It has been an interesting month for USDJPY, with the pair bouncing off a key resistance zone just above 122.00 before sliding towards channel support. It’s now decision time for USDJPY; a break here could spark a larger sell-off.
Is this the end of its upward trend?
There are some technical signals that may highlight some underlying weakness in price. There is a bearish divergence between price and RSI and there was recently a bearish crossover in daily MACD. This tells us that momentum is shifting to the downside and price may have further to fall. However, we want to see a confirmed break of its upward trend and 50 and 100-day SMAs before becoming too bearish.
Japan’s inflation numbers
The release of Japanese inflation figures tomorrow will be a key event for the yen. We’re expecting core CPI growth to slip to 2.1% y/y from 2.2% y/y last month. Once the effects of the increased sales tax are taken out, core inflation is only around 0.1%, which is nowhere near the BoJ’s 2% target. In fact, disinflation is at risk of becoming deflation, where consumer prices actually begin falling year-on-year.
Why isn’t the BoJ ramping up stimulus to pre-empt possible deflationary conditions?
The BoJ thinks, at least for the moment, that the recent bout of disinflation can be blamed on falling oil prices and it doesn’t respond to temporary threats to its inflation outlook. While it’s is true that falling oil prices is weighing heavily on inflation, even non-tradables inflation is soft. This is largely why we expect the BoJ to pump more stimulus into the economy later in the year, but not until after spring wage negotiations.
What does this mean for the yen?
An increasing monetary base in Japan isn’t a good thing for the yen. After all, economics 101 tells us that if demand remains the same and supply is essentially increasing then the price of said asset should be lower. This is basically what is happening in Japan, but the market is expecting the BoJ to pump more stimulus into the economy, thus it’s is already largely priced into the yen. So, while we don’t like the yen from a fundamental standpoint, it’s unclear if the market can become even more bearish on the currency in the near-term.