Japan falls into "recession," USD/JPY bulls may target 13-year high around 125.00

It’s been a quiet start to the week as the world reflects on the horrific terrorist attack in Paris over the weekend. Our thoughts remain with all the families impacted by this weekend’s awful events, but the impact on markets has thus far been limited.

USD/JPY initially gapped lower as traders bought the safe have yen, but a weaker-than-expected Japanese GDP report quickly drove the pair back higher. Japan’s Q3 Preliminary GDP reading game out at -0.2% q/q, worse than that -0.1% reading anticipated by economists. Alarmingly, the capital expenditure portion of the report fell by 1.3%, showing that Japanese businesses remain wary of the future outlook for the economy, though private consumption did rise a relatively healthy 0.5% q/q.

Combined with the negative Q2 GDP reading, this means that the country has fallen into an technical “recession” (two consecutive quarters of falling GDP). For its part, the Bank of Japan had already anticipated disappointing economic growth in its forecasts, so today’s weak reading alone is unlikely to prompt more easing from the central bank. That said, if the economy doesn’t recover meaningfully heading into Q1 2016, the BOJ may have no choice but to expand stimulus.

Technical view: USD/JPY

USD/JPY has rallied sharply off the bearish gap lows to regain the 123.00 level as of writing, and more importantly, rates appear to be breaking out of last week’s bullish flag pattern. If you’re not familiar, a bullish flag pattern is created by a shallow, controlled pullback after the big rally and suggests that the uptrend is likely to resume once we clear the top of the near-term bearish channel.

Meanwhile, the secondary indicators are also pointing to the potential for further gains in USD/JPY. To wit, the MACD continues to trend higher above its signal line and the “0” level, showing bullish momentum, while the RSI indicator has pulled back from overbought territory. With today’s price action forming a possible Bullish Engulfing candle*, the stage could be set for more USD/JPY strength this week.

To the topside, the next hurdle to watch will be last week’s high at 123.60, which also represents the 78.6% Fibonacci retracement (not shown). Above that barrier, bulls could try to push USD/JPY back toward its 13-year high around 125.00. At this point, only a break below today’s low at 122.20 would erase the near-term bullish bias.

*A Bullish Engulfing candle is formed when the candle breaks below the low of the previous time period before buyers step in and push rates up to close above the high of the previous time period. It indicates that the buyers have wrested control of the market from the sellers.