The technical situation for USDJPY has looked indecisive for the better part of a month and we’re getting to the point where the pair needs to commit one way or another. Next week offers key even risks for the two in the form of a Shinzo Abe speech on October 1 that will see the prime minister announcing plans for: (1) a possible corporate tax break (interesting, rumours of this tax cut this week saw a sharp weakening of the JPY that was quickly erased), (2) whether there will be a stimulus (and whether that stimulus will be financed with debt issuance – probably too early for overt money printing), and (3) whether the sales tax increase will go forward on schedule. Also next week we have the major US economic activity surveys and the US employment report on Friday as well as a Bank of Japan meeting that same day.
In the options market, one-week options are extremely bid in recognition of the near-term risk for volatility while one-month option implied volatility remains low relative to recent history, probably due to the indecisiveness of the chart.
Factors working on the JPY next week
Reasons for pressure on USDJPY to the downside lately include the recent decision by the Fed not to taper asset purchases, even if we’ve had lots of Fed jawboning on the decision being a close one. As well, it appears we have emerging market worries cropping up again, as the JPY is the favourite carry trade funding currency out there at the moment and this serves as a headwind.From here, the most JPY positive factors would be: modest or no corporate sales tax break and a modest stimulus while US data is weak and bonds look strong and risk weak. A sales tax delay would also be seen as JPY positive because the Bank of Japan has targeted this tax as a risk to the recovery and as a policy trigger.
The most JPY negative factors would be a sales tax increase, a corporate tax cut and any stimulus announcement, especially if it is large and not debt financed (the latter would be a real shocker at this point). Meanwhile, if the US data all comes in unequivocally strong (both ISMs and the Friday employment report), this could set up fear of an October taper.
Chart: USDJPY
The trend lines are fairly obvious to the downside, as is the Ichimoku cloud area. The pair really needs to take out 98.00/97.50 to open up a downside break scenario, possibly toward the 200-day moving average or the previous lows from the summer. To the upside, 100.00 is the first milestone, followed by the 100.60+ high. Stay tuned, next week won’t be as quiet for USDJPY as this week
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