Yen extends weakness as Japan delays sales tax

Forex News and Events

The official announcement finally came yesterday from the Japan PM Shinzo Abe. Abe delayed the second round of sales tax hike from October 2015 to April 2017 as data showed the Japanese recovery remains very much fragile to withstand additional taxes. The parliament is expected to be dissolved by Friday, taking Japan to snap elections in December. At the following BoJ meeting, the policymakers maintained the pace of easing at 80 trillion yen annually with 8 votes against 1. USD/JPY broke yesterday’s double top at 107.05, tested 107.50+ resistance. The bullish momentum gains strength across the board, EUR/JPY advances to 147.38 at the time of writing. While the delay in sales tax hike push the JPY lower, the snap elections in December should start injecting anxiety regarding the future of the Abenomics. We are heading into a critical period in Japan. What if the ruling coalition fails to obtain majority? What if Abe steps down? Are we approaching the end of Abemania? If so, what is next? We believe the surging political uncertainties will soon challenge the JPY-bears building strong resistance pre-120.

Political anxiety to surge shortly

The Yen lost more than 45% against the US dollar since Shinzo Abe first stepped in power end-2012. He put in place a drastic program, commonly known as “Abenomics” to fight more than a decade long inflation in Japan. Abenomics is based on three “arrows”: massive monetary easing, fiscal stimulus and structural reforms. If the massive Yen debasing pushed the consumer prices pleasingly higher in the first quarter of 2014, the slow improvement in exports and stagnation in wages growth weighed heavier than thought on household consumption following the first sales tax hike last April.

Given the significant deterioration in Abenomics following April 2014 hike (from 5% to 8%), the delay in the second step of sales tax hike (from 8% to 10%) is most probably a wise and anticipated decision from the populist leader Abe. In his press conference yesterday, Abe vowed that there will not be a second delay in tax consolidation, while insisting that the country should not miss the opportunity to step out of the deflationary cycle. Japan is now walking toward early elections and the PM Abe says he will resign in case the ruling coalition fails to obtain the majority. We see little probability in such outcome. However if the coalition fails to survive the December elections, it would be directly understood as the rejection of the Abenomics and would certainly harm the inflation expectations and hit the negative JPY trend.

GBP/JPY stagnates at 181.15/184.75 range

The GBP/JPY sees strong resistance pre-185.00 as GBP weakness partially offset the recent JPY sell-off. As the bullish momentum in GBP/JPY fades, a daily close below 181.00 (MACD pivot) should signal a short-term bearish reversal pattern. Especially given the overbought conditions, breakdown toward 179.50/180.00 zone is possible yet the downside is seen limited as the BoE minutes displays more optimistic read relative to what we heard at last week’s QIR. The UK policy makers were 7-2 to keep the bank rate at historical low of 0.50%. While the concerns on Euro-zone’s moderate recovery keep the majority on the cautious camp, some believe that the slack should deteriorate faster and boost inflation faster than expected above 2% target. While the slight improvement in CPI (up from 1.2% to 1.3% y/y) failed to boost GBP-enthusiasm yesterday, today’s minutes should give some assurance to BoE hawks.

Today's Key Issues (time in GMT)

2014-11-19T12:00:00 USD Nov 14th MBA Mortgage Applications, last -0.90%
2014-11-19T13:30:00 USD Oct Housing Starts, exp 1025K, last 1017K
2014-11-19T13:30:00 USD Oct Housing Starts MoM, exp 0.80%, last 6.30%
2014-11-19T13:30:00 USD Oct Building Permits, exp 1040K, last 1018K, rev 1031K
2014-11-19T13:30:00 USD Oct Building Permits MoM, exp 0.90%, last 1.50%, rev 2.80%
2014-11-19T19:00:00 USD U.S. Fed Releases Minutes from Oct, 28-29 FOMC Meeting

The Risk Today

EUR/USD's bounce has thus far been unimpressive. The resistance at 1.2577 is intact. Another resistance can be found at 1.2632. Hourly supports stand at 1.2395 (11/11/2014 low) and 1.2358. In the longer term, EUR/USD is in a downtrend since May 2014. The break of the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low) has opened the way for a decline towards the strong support at 1.2043 (24/07/2012 low). A key resistance stands at 1.2886 (15/10/2014 high).

GBP/USD remains weak. The hourly support at 1.5593 (14/11/2014 low) is challenged. Hourly resistances can be found at 1.5679 (18/11/2014 high) and 1.5736. In the longer term, the break of the support at 1.5855 (12/11/2013 low) confirms an underlying bearish trend. A conservative downside risk is given by a test of the support at 1.5423 (14/08/2013 low). Another support can be found at 1.5102 (02/08/2013 low). A key resistance lies at 1.5945 (11/11/2014 high, see also the declining channel).

USD/JPY continues to rise, as can be seen by the new highs above the hourly resistance at 117.05 (17/11/2014 high). Hourly supports can be found at 116.34 (18/11/2014 low) and 115.46 (17/11/2014 low). A resistance can be found at 117.95 (15/10/2007 high). A long-term bullish bias is favoured as long as the key support 105.23 (15/10/2014 high) holds. The break of the major resistance at 110.66 (15/08/2008 high) opens the way for a further rise towards 120.00 (psychological threshold, see also the 61.8% retracement of the 1998-2011 decline). A major resistance stands at 124.14 (22/06/2007 high).

USD/CHF continues to move within its declining channel. A key support stands at 0.9544. Hourly resistances can now be found at 0.9655 (see also the declining channel) and 0.9701. Another support can be found at 0.9442. From a longer term perspective, the technical structure favours a full retracement of the large corrective phase that started in July 2012. The recent new highs above the key resistance at 0.9691 confirm this outlook. A strong support stands at 0.9368 (15/10/2014 low). A key resistance can be found at 0.9839 (22/05/2013 high).

Resistance and Support: