No Santa Claus rally for USD/JPY

For those intrepid traders still tracking the markets on Christmas Eve, today’s breakdown in USD/JPY could be a big development with repercussions that stretch into 2016.

For USD/JPY bulls, the struggles started with the Bank of Japan’s meeting last Friday. In that fateful gathering, the BOJ opted to change the composition of its long-running asset-buying program to allow purchases of more risky assets, including ETFs and longer-dated bonds.

Analysts have long been calling for the central bank to do more to stimulate Japan’s moribund economy, but this half-hearted measure was hardly what they were hoping for. Speaking bluntly, most traders were expecting that the BOJ would be more aggressive in 2016, perhaps by expanding QQE in its major meetings in January or April.

Not only will last Friday’s tweaks do little to stimulate the Japanese economy, but they also suggest that further action is less likely early next year. To wit, the accompanying statement did not hint at further actions coming down the pipeline or any fresh concerns about economic performance. Worst of all, there were three dissents to the BOJ’s actions, suggesting that BOJ Governor Kuroda is facing difficulty building a consensus around more aggressive easing.

Technical view: USD/JPY

After an initial spike higher, USD/JPY reversed violently back to the downside as traders digested the implications of the BOJ’s half-baked plan. The sharp reversal created a large Bearish Engulfing Pattern* on the daily chart, signaling a shift from buying to selling pressure and leading to a continuation lower so far this week.

Earlier today, the pair broke below its bullish trend line off the August lows, suggesting that we could see further losses moving into next week. The secondary indicators confirm this sentiment, with the MACD trending lower below its signal line and the “0” level, while the RSI indicator remains within a near-term downtrend.

Looking ahead, the key support levels to watch will be the psychologically-significant 120.00 level, followed by major previous support at 118.50. At this point, the only way near-term bulls will be comfortable establishing new trades will be if the pair can claw its way back above previous resistance at 123.50, an unlikely development in our view.

At this point, it looks like USD/JPY bulls will be getting a lump of coal in their stockings…

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