What's Going On With The Yen?

Yesterday we wrote a piece that suggested the reason for USDJPY weakness was the narrowing of the short term (2-year)spread between US and Japan bond yields, which was negative for the greenback. But since then not even 'taper' talk from Fed members could halt the slide in USDJPY in the last 12 hours.

So why the decline in USDJPY?

1,In the short term USDJPY is not moving in line with its yield spread (see figure 1), the 2-year yield spread actually widened slightly yesterday, which should be USD positive. Likewise, the 10-year yield spread is also close to a 2-year high.

2, This leaves the relationship between USDJPY and the Nikkei as the chief reason for the decline (see figure 2). The Nikkei and the yen have a close negative correlation, so when the Nikkei falls USDJPY tends to follow suit. The decline in the Nikkei was driven by some weak earnings data and the index closed down 4% today.

On Tuesday we were looking for a recovery in USDJPY, which, as it turned out, was premature. Once bitten, twice shy? No way, I still think there are two reasons why the USDJPY looks oversold and we could be making a low around 96.80:

The dollar is not falling on a broad-base basis, in fact it's stronger against the other G10 currencies today, and the dollar index is making fresh highs of the day after making a temporary low around 81.50. Today's USDJPY move is mostly down to strength in the yen rather than weakness in the USD.

The BOJ meeting could be the trigger of a USDJPY recovery as the spike higher in the yen may encourage the BOJ to 'talk' down the currency and limit yen strength.

Levels to watch in USDJPY:

Support:
After smashing through our prior support level at 97.50, the next support of note includes 96.20 – the 76.4% retracement of the May high to Mid-June low.
95.90 – a sticky level of resistance from 19th June.


Resistance:
97.55 – the 61.8% retracement of the May – June decline, and prior support level.
98.50 – the daily cloud base.
98.75 – the cloud top.

IMOH, Clement I.
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