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USD/JPY Takes Biggest Plunge in Three Years After Nikkei Bubble Bursts

USD/JPY Takes Biggest Plunge in Three Years After Nikkei Bubble Bursts

Christopher Vecchio, CFA, Senior Strategist


After touching its highest level in four and a half years, the USDJPY staged a massive overnight reversal, falling from a high of ¥103.73 on Wednesday to as low as 100.82 in early European trading hours today. In a sell-off that is being credited to the weak Chinese private sector manufacturing report, the Nikkei 225 plunged -7.32%, the single largest drop since October 2008 – the beginning of the end for global equities. However, Japanese Economic Minister Akira Amari said that is normal for equity losses to boost the domestic currency, and that the stock bubble hadn’t yet popped (I think a decline of this magnitude in one session is a mini-bubble bursting); thus Yen losses should be insulated.

Despite the single greatest drop in three years for the USDJPY, the US Dollar overall remains resilient, with the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) retaining some of yesterday’s gains, while holding its ground against the commodity currencies. A lot has been said about the scope of Fed Chairman Ben Bernanke’s comments yesterday – that QE3 would remain in place until data improved, and if it did, then the scale of asset purchase could decline – but to me, it’s more of the same.

Chairman Bernanke reiterated nearly every talking point from the Fed over the past few weeks, including from those in his inner circle, such as NY Fed President William Dudley. As noted yesterday, the Fed’s tone is and remains: ‘the economy is improving, but isn’t great yet; the labor market is steadily moving upwards, but isn’t where it should be for us to withdraw stimulus; disinflation is setting in, but stronger consumption persists; and the payroll tax and ensuing budget sequestration have created quite the fiscal drag.’ I don’t expect any sort of news about a taper at the June meeting (barring a +300K NFP print); any such major shift in policy is likely to occur at the September meeting.

Taking a look at European credit, higher peripheral yields alongside Yen strength has prevented the EURUSD from staging a bigger rally today. The Italian 2-year note yield has increased to 1.320% (+4.4-bps) while the Spanish 2-year note yield has increased to 1.746% (+7.8-bps). Likewise, the Italian 10-year note yield has increased to 3.987% (+8.1-bps) while the Spanish 10-year note yield has increased to 4.228% (+7.0-bps); higher yields imply lower prices.


JPY: +1.74%

CHF: +1.07%

CAD: +0.28%





Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.47% (+0.46%past 5-days)


USDJPY_Takes_Biggest_Plunge_in_Three_Years_After_Nikkei_Bubble_Bursts_body_Picture_1.png, USD/JPY Takes Biggest Plunge in Three Years After Nikkei Bubble Bursts

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USDJPY_Takes_Biggest_Plunge_in_Three_Years_After_Nikkei_Bubble_Bursts_body_x0000_i1028.png, USD/JPY Takes Biggest Plunge in Three Years After Nikkei Bubble Bursts

EURUSD: Yesterday I said: "My bearish bias would be negated on a weekly close >$1.3000/30 (May 14 swing high and 200-SMA).I prefer selling rallies into 1.2975/3000.” Indeed, 1.2999 marked the top yesterday and although price has been lifted modestly today, there is reason to believe that the next leg of EURUSD weakness is beginning. A close > 1.3000/30 remains key for a reversal of bias, and a break of 1.2795/800 would confirm the move towards 1.2750 and 1.2680.

USDJPY_Takes_Biggest_Plunge_in_Three_Years_After_Nikkei_Bubble_Bursts_body_x0000_i1029.png, USD/JPY Takes Biggest Plunge in Three Years After Nikkei Bubble Bursts

USDJPY: We almost got the blowout move yesterday but price was capped by the same trendline that constrained the move above ¥103.00 on Friday, with price topping at 103.73. The reversal cut through the key 101.80 level, leading to a deeper pullback to the 21-EMA at 100.80/90. This level also is ascending trendline support off of the April 2 and April 31 lows, coinciding with the same trend on the daily RSI. A further breakdown eyes a move towards 100.00, then 97.50.

USDJPY_Takes_Biggest_Plunge_in_Three_Years_After_Nikkei_Bubble_Bursts_body_x0000_i1030.png, USD/JPY Takes Biggest Plunge in Three Years After Nikkei Bubble Bursts

GBPUSD: Yesterday I said: “The GBPUSD is back pressuring last week’s lows. With price holding below the $1.5200/20 region I was watching last week, a move towards the early-April lows at 1.5035/75 now eyed….with daily RSI support cracked, the plan is to sell rallies.” Indeed, the lower 1.5035 target was reached, and with the trade stretched to the downside, brief pause allowing the 8-EMA to catch up to current price could occur. I still prefer selling rallies towards the big picture move towards 1.4200.

USDJPY_Takes_Biggest_Plunge_in_Three_Years_After_Nikkei_Bubble_Bursts_body_x0000_i1031.png, USD/JPY Takes Biggest Plunge in Three Years After Nikkei Bubble Bursts

AUDUSD: No change: “The AUDUSD closed below the key 0.9860 level last week, ascending channel support off of the October 2011 and June 2012 lows, as well as the weekly 200-DMA. That is to suggest that a top in the pair back to the July 2011 high at 1.1079 is in place, though I’d prefer for a monthly close below 0.9860/900 for better confirmation. Now, a deeper pullback towards 0.9580 and 0.9380/400 is beginning. In the very near-term, with the weekly RSI at the lowest level since the height of the global financial crisis in the 4Q’08, the AUDUSD is probably close to a point of near-term exhaustion. Rebounds should be sold.”

USDJPY_Takes_Biggest_Plunge_in_Three_Years_After_Nikkei_Bubble_Bursts_body_x0000_i1032.png, USD/JPY Takes Biggest Plunge in Three Years After Nikkei Bubble Bursts

S&P 500: No change as the intraweek Bull Flag broke to the upside and hit top rail resistance at 1665 on Friday: “The headline index remains strong although there is some theoretical resistance coming up (this is unchartered territory, so forecasting price relies heavily on valuations, mathematical relationship, and pattern analysis)…It’s hard to be bearish risk right now, but it is worth noting that the divergence between price and RSI continues, suggesting that few new hands are coming into the market to support price (recent volume figures would agree).” Channel resistance from mid-April comes in at 1670, while support is at 1648 (8-EMA) and 1642 (steep channel support).

USDJPY_Takes_Biggest_Plunge_in_Three_Years_After_Nikkei_Bubble_Bursts_body_x0000_i1033.png, USD/JPY Takes Biggest Plunge in Three Years After Nikkei Bubble Bursts

GOLD: No change: “If the US Dollar turns around, however (as many of the techs are starting to point to), then Gold will have a difficult gaining momentum higher. Indeed this has been the case, with Gold failing to reclaim the 61.8% Fibonacci retracement of the April meltdown at $1487.65, only peaking above it by 35 cents for a moment a few weeks ago.” Price is back under 1400, and if US yields keep firming, a return to the lows at 1321.59 shouldn’t be ruled out.

--- Written by Christopher Vecchio, Currency Analyst

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