Traders are pointing to the downgrade to global growth from the International Monetary Fund (IMF), but this seems strange as most were expecting this anyhow. Still, a look around the capital markets shows a strong move lower in US stocks, with the S&P 500 closing back below the November 2012 uptrend at 1956. We also saw the US ten-year treasury fall eight basis points to 2.33%, with yields testing the year’s lows of 2.30%. The volatility index (also known as the VIX) spiked 11.7% on the day as traders bought call protection.
While poor German data has also been thrown into the mix, the fact the BoJ are sending fairly mixed signals about its view on the JPY weakness suggests the downside is limited from here. We’ve all seen the strong upside move in USD/JPY – that seems to be having a strong impact on future easing expectations from the economist community – and many feel the prospect of an expansion to its asset purchase program has lessened.
There was also speculation that the review to the US$1.4 trillion Japanese Government Pension Investment Fund (GPIF) has been pushed out into the next couple of months. This should have positive ramifications for the JPY.
Recall this review is looking at the reallocation of funds to riskier assets, and therefore offshore funds. This should create capital outflows.
One pair I have looked at is NZD/JPY, with the weekly picture looking fairly bearish (see chart). The daily chart highlights a break of strong support at ¥86.00 (the May/August double bottom). The MACD and stochastic show that rallies should be contained.
For traders who don’t mind looking a little longer-term, the weekly chart looks very interesting. The 55-week moving average has been breached and the double-top neckline (which naturally can be seen on the daily chart) has given way, effectively targeting the ¥80 level. Two weeks ago, we saw a strong bearish reversal and this seems to be playing out well.
I also feel we have to take a view on USD/JPY here, which is driving everything in the currency market right now. Price action here is looking fairly dicey. I would be selling rallies in NZD/JPY and closing on a move above ¥86.15 (just above the 55-week moving average and the 38.2% retracement of the recent sell-off). My potential target is ¥82.15.