USD/JPY Technicals – Daily Kumo Breached for 1st Time in Almost 6 Months

USD/JPY continued its journey south, with US weaker than expected ISM Manufacturing data not helping bulls, weakening USD and pushing USD/JPY deeper lower. Price has since given up almost 400 pips since early March, and all these was due to lack of confidence in BOJ in boiling over, as traders who have bought into the BOJ easing promise close out their positions believing Kuroda and his deputies may not be able to live up to market’s expectation. Such sentiment is not new, with USD/JPY prices plateauing back in Feb due to the exact same reasons, until Kuroda’s nomination pushed price higher as market gives Abe and his supporters one more chance just to see what new things Kuroda can bring.

One month and a few speeches here and there later, we are still none the wiser what exact plans Kuroda has. Despite being confirmed and sworn in as the BOJ Governor, Kuroda has been basically saying the same thing: Bold Monetary Policy, 2% CPI target, 2 years dateline etc. No concrete plans have been laid out and market is slowly losing patience with BOJ, with price trading back towards Feb highs. Yesterday perhaps was the final straw, or the last few ones at least as we approach Thursday BOJ meeting – Tankan data show that firms are not expanding as much as we think they are in Q1, despite all the bullishness brought about by Abenomics. This doubt about Abenomics’s effectiveness dented confidence significantly – which USD/JPY is running purely on, and pushed USD/JPY deep into Feb consolidation region.

Daily Chart

Daily chart tells us that price has entered the rising Kumo for the first time since 16th Oct ’12. Even though Kumo can provide support, stronger support can be found by Feb’s floor around 92.0. This level is below current Kumo, and Ichimoku is highly likely to form a bearish Kumo twist when price reaches that area, enhancing the scenario for a bearish breakout below. Stochastic readings have entered Oversold region, but neither Stoch nor Signal appears to be flattening, which suggest that a trough is not at risk of being form here.

Hourly Chart

The sharp rate of decline is more apparent on the hourly chart. Stochastic readings have currently rebounded back from Oversold region, however traders should be caution about treating it as a bullish reversal. Using yesterday’s small bump as example, this currently “bull cycle” suggested by Stochastic may find resistance around 93.2 – 93.4 before reverting to underlying trend, similar to what we’ve observed yesterday with the “lump” seen in readings around US trading hours.

Looking at such strong bearish momentum, the question we would ask is – is this a good time to sell? Ultimately, there is a lot of speculative action surrounding Yen pairs due to the anticipation of BOJ. Yen has ceased to be moved by fundamental Japanese economy for a very long time – Weaker Japanese econ data: USD/JPY goes up; Stronger Japanese econ data: USD/JPY goes up. With that in mind, Thursday’s BOJ announcement may result in a fall in speculative action from now. As such, a continued fall from here that can result in the piercing of Kumo (daily chart) based on technical sentiment may be unlikely, and traders will end up needing to wait for the actual outcome on Thursday to determine longer-term direction. Buying into this short-term momentum – as impressive as it may look – will be highly speculative and exposes the trader to high event risk.

Granted, the likelihood of Kuroda surprising market BEYOND the current 1,500 pips head start market has given BOJ since the rally from Sep lows. The higher the expectation, the harder the disappointment. This old adage lines up nicely for a USD/JPY fall in the future. However, one of the rules of trading is to prepare for the unexpected – Kuroda has said that market expectations must be backed up in his speech to Japanese parliament today. It appears that he wants to satisfy the market, and in the odd chance that he succeed in doing it, USD/JPY can easily reverse recent loses to mount an attack back towards triple digits, the levels which Japanese politicians believe is “correct”.

More Links:
AUD/USD – RBA Holds Rate, Slightly More Upbeat
USD/SGD Technicals – 1.24 broken with fresh downside pressure
EUR/USD Technicals – Well supported but long-term bears remain

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