USD/JPY – New Highs (yet again) But Bullish Conviction Low

Yen weakened further against the Greenback this morning following a slew of economic data release. First off the bad news – Household spending have slowed to a 0.2% growth versus an expected 1.8%, while Jobless Rate remained at 4.0% despite expectations of a slight decline to 3.9%. Industrial Production was also lower than expected at 5.0% vs the expected 5.4%, with Nov M/M growing at a painfully slow pace of 0.1%. The good news was that Retail Trade grew at a strong 4.0% vs 3.0% expected and a huge leap from previous month’s 2.4% growth. This number becomes all the more impressive when we adjust for seasonality, where Retail Trade grew 1.9% versus an expected 1.0% and a reversal from previous month’s -0.9% shrinkage.

The not so great one? Japan headline CPI meeting expectations of 1.5% Y/Y, showing that BOJ is on track to hit its 2% CPI target in 2014.

Why is this not considered wonderful news? Well, looking at the amount of stimulus that the Japanese Central Bank is pumping in and the huge slide in Yen, higher inflation growth is a definite certainty. Hence, it is not surprising to see USD/JPY retracing back almost all its post data release gains as traders realized that there is no good reason to “reward” BOJ and Abe with higher stock prices nor weaker Yen due to this. In fact, on the balance of all data released today, Japan’s economy is actually weaker that we thought it would be 1 year after Shinzo Abe has come into power. Also, the pace of growth in household spending is lower than CPI growth, suggesting that absolute consumption rate is actually lower, not higher. Abenomics is helping assets prices rallying, but that is in no way representation of the economic true health.

Hourly Chart

Not that traders are concerned though, prices remain above the 104.8 resistance turned support despite the pullback. Even if prices breach below 104.8, it is likely that support will be found above 104.6. Rightly or wrongly, market is expecting yet more stimulus from BOJ and Shinzo Abe in 2014 which will drive Yen even weaker.

Weekly Chart

Looking at Weekly Chart, we have a bullish breakout on our hands right now, but given current low volume holiday season, it is unlikely that we will see strong directional push that can bring us much higher from here. On the fundamentals front, it remains to be seen how market will react should Abenomics and BOJ’s 2% inflation target failed to rejuvenate the Japanese economy. Would Yen strengthen if they fail? Perhaps, as market may stop providing bullish premium to USD/JPY. Then again, Yen may still weaken as the failure of Abenomics and all the stimulus would mean that Japanese economy is utterly broken, and that should have a weakening impact on its fiat currency. On the other hand, should Abenomics proved to be successful and Japan manage to dig herself out of the deflationary cycle without additional stimulus, will USD/JPY continue to rally due to market’s confidence in BOJ’s ability to steady the ship? Or perhaps Yen will naturally strengthen when the economy is strong enough according to economics 101?

So many questions so little answers, and we are at best speculating right now. The truth of the matter is that market sentiment will play a large part in the future, and hence traders will do well to monitor the ever changing market sentiment instead of automatically assuming that this bullish breakout will bring us back to 120s. The possibility is there, but the road may not be as easy as we think.

More Links:
EUR/USD Technicals – S/T Bears Banished But It’s No Bullish Wonderland
GBP/USD – Strong Gains After Positive US Unemployment Claims
USD/CAD – Loonie Holds Firm After Strong US Unemployment Claims

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.