Just when USD/JPY appeared ready to reach new highs, the pair crashed by almost 300 pips in a single day. Is the rally over or can USD/JPY still recover? Here are three reasons why a rebound is possible:
1. Just a major technical correction?
During last Thursday’s Asian session, the Nikkei plummeted by 7.3%, marking its steepest one-day drop in two years. While the sharp drop seems like such a staggering amount, putting things in perspective with the Nikkei’s 50% climb since the start of 2013 reveals that the selloff was most likely a major correction.
Financial analysts claim that market corrections are typically proportional to the recent rallies. In other words, the higher the climb, the harder the fall. This was also reflected in USD/JPY’s price action when it tumbled by nearly 300 pips on Thursday, a large retracement from its 500-pip climb since the start of May.
USD/JPY’s uptrend is still intact for now though, as the pair just bounced off the 50% Fibonacci retracement level and the rising trend line on the 4-hour time frame. Should the pair dip any lower, there’s still potential support at the 100.00 major psychological handle and at the 99.50 former resistance level.
2. BOJ still aggressively easing
In its latest monetary policy statement, the BOJ reiterated its pledge to increase money supply by 70 trillion JPY each year through purchases of Japanese government bonds. Not even the sudden spike in bond yields was enough to make BOJ Governor Kuroda and his men back down with their aggressive easing scheme, although they did say adjustments could be made if necessary.
Let’s not forget that the BOJ is set on saving Japan from deflation and achieving its 2% inflation target in two years. Kuroda is confident that their massive quantitative and qualitative easing program will do the trick, as it has gotten a thumbs-up from the G7 earlier this month.
3. Fed to reduce easing?
On the other side of the coin, the U.S. Federal Reserve has expressed its intention to scale down the size of its bond purchases as soon as the economy shows sustained improvements in labor and inflation. This was confirmed by Fed head Bernanke’s testimony and the release of the FOMC meeting minutes earlier this week.
The FOMC minutes revealed that some policymakers are already clamoring for a reduction of their bond purchases by next month while Big Ben even touched upon the possibility of tapering off bond purchases “in the next few meetings.” Of course this decision hinges mostly on how the U.S. economy is faring, which suggests that traders will be keeping very close tabs on U.S. reports in the coming days.
The combination of further easing from the BOJ and the possibility of reduced bond purchases from the Fed is likely to keep the yen weak and the dollar strong in the near term. It also helps that USD/JPY has just undergone a major correction, which suggests that traders might’ve taken that opportunity to hop in the uptrend at a better price.
However, potential risks are still around. Aside from the prospect of weak data from the U.S., there are other factors that could weigh USD/JPY down. As we’ve witnessed earlier during the week, remarks from Japanese officials highlighting the damage caused by the weak yen could keep USD/JPY’s rallies at bay. On top of that, another strong surge in Japanese bond yields could lead to calls for an end of the BOJ’s easing program.
With these reasons supporting a USD/JPY rally and the potential risks, do you think the pair is in for a rebound? Let us know by voting through the poll below!