Shakeout in the Yen on Prospect of ’Helicopter Money’

2016-07-21 13:30:00

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Talking Points:

- The prospect of additional Japanese stimulus continues to bring strength to global risk markets as investors attempt to front-run more Japanese stimulus.

- A news report in the overnight session had communicated that BoJ Governor Kuroda had rebuked the possibility of ‘helicopter money’ for Japan. This created a quick bout of Yen-strength as some stimulus bets came out of the market. But it later came-out that this interview was over a month old, and the Yen found resistance (support in USD/JPY, EUR/JPY, GBP/JPY) before moving back-in the trend-side direction.

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The big takeaway from the overnight session was volatility in the Yen, and this has some fairly interesting motivators. In a BBC interview that was broadcast this morning, the Head of the Bank of Japan, Haruhiko Kuroda said that there was no possibility of ‘helicopter money’ for the country. Later in the session, it came out that this interview was actually conducted in June, before the well-publicized meeting with Ben Bernanke in which the topic of helicopter money was initially floated. This is a hot trigger-word at the moment, as bets on additional Japanese stimulus have seemingly coalesced into bets that Japan will embark upon the untested, theoretical concept of helicopter money, which is also known as ‘QE for the people,’ rather than ‘QE for the banks.’

As we had written in the Yen forecast for this week, helicopter money is unlikely in Japan in the near-term, as this technically wouldn’t even be legal as of right now. Japanese law prohibits the country from directly underwriting government debt. To accomplish helicopter money, Japan would need to coordinate monetary and fiscal policies so that they can a) underwrite their own debt and b) distribute it into the financial system. And while current Japanese law doesn’t preclude modifications down-the-road that might make this possible, given the very untested nature of this theory and also given the response that the Bank of Japan has seen from other very theoretical moves (like negative rates, buying stocks with QE), it would make sense for the bank to embark on this concept slowly, if at all.

However, even if we do not see a form of ‘helicopter money’ in Japan’s near future, this doesn’t rule out the prospect of the ‘comprehensive, bold economic stimulus package’ that Japanese Prime Minster has previously alluded to, saying that it would be coming this fall. And given the recent win of Abe’s coalition in the upper-house of Japanese Parliament, resistance to further stimulus will likely be lessened moving-forward.

But after the month-old interview with Kuroda took markets very much by surprise, we saw a quick spike of Yen strength; surging 200-pips against the US Dollar, 300-pips against the British Pound and 230-pips against the Euro. And as we later heard that this was a dated interview from last month, weakness returned to the Yen as stimulus bets have flowed back-in to markets. On the three charts below, we look at the current technical setup in each market.

USD/JPY

USD/JPY had just set a fresh near-term high at the 107.50 psychological level yesterday before this retracement came-in; and that retracement moved price action down towards a big, confluent zone of support. At 105.42 is 76.4% (a 23.6% retracement) of the post-Brexit move in the pair, and just a few pips below that we have the 50% Fibonacci retracement of the 2002 high to the 2011 low in the pair. And 35 pips below that level we have the 105-psychological level.

Created with Marketscope/Trading Station II; prepared by James Stanley

EUR/JPY

EUR/JPY had just set a higher-high in the overnight session by a few pips before turning around. Support came in on a projected trend-line of the near-term lows (shown in red on the chart below), and after the European Central Bank made no adjustments to policy at this morning’s meeting, the pair has begun to move higher again. The key level in EUR/JPY appears to be around the 115.00 psychological level, as 37 pips above this price we have a key Fibonacci level of the ‘Abenomics’ move in the pair, taking the low in the year 2012 to the high of 2014. At 115.37 is 38.2% of the total move (61.8% retracement of the move), and this had previously provided a rather brisk price action inflection last week while also functioning as a ‘swing-high’ after the violent declines of the Brexit-move.

Created with Marketscope/Trading Station II; prepared by James Stanley

GBP/JPY

We had written a technical piece on GBP/JPY yesterday, noting the five days of resistance that had shown at a key Fibonacci level at 140.63. This is 61.8% of the Post-Brexit move (a 38.2% retracement of the move), and traders had continually come-in to sell this level over the previous week. This would normally be a bearish connotation, but given the higher-lows that have been seen over the past week combined with the macro backdrop that was seemingly changing in the Yen behind the expectation for even more stimulus, this set up an ascending wedge pattern in the pair.

The quick turn-around of Yen-strength this morning had sent the pair from above 142.25 down to just above the 139-handle, and now support appears to be forming above the prior ‘higher-low’ around 138.32. On the chart below, we look at the near-term channel that’s been building on the hourly in GBP/JPY.