Talking Points:
- USD/JPY has consistently returned to range lows around the 100 mark following the initial Brexit plunge
- This level is technically the mid-point of the past decade's range - a period from record lows to full scale BoJ QE
- Speculation that Japanese authorities are prepared to defend 100 has created hesitation
See the DailyFX Analysts' 3Q forecasts for the Dollar, Euro, Pound, Equities and Gold in the DailyFX Trading Guides page.
There is considerable weight in the 100 level for USD/JPY - some of it tangible, some of it purely the product of speculation. Yet, whether it is being propped up by sound technical and fundamental analysis or purely by indecision over psychological threats, the market has held. The idling around the 'parity' level isn't a calm holding pattern though. There is tension building behind speculation built on fear and opportunity. The next leg this pair chooses will offer insight into global risk trends, the effectiveness of monetary policy and the desperation driving competitive FX devaluation.
From a technical perspective, there is reason to believe that 100 can offer at least a significant rebuff to the speculative tide. Not only is there recent context to support post-Brexit (June 23/24), but we seen this level redirect markets multiple times over the past years. Further, the mid-point (50 percent Fib) to the rally from the 2011 record low to the June 2015 high falls right in line with this level (technically, at 100.60). That said, psychological factors likely present greater support to the market. There was heavy speculation that Japanese policy officials (BoJ and Ministry of Finance) had a particular level in mind to mount a defense against a steadily appreciating Yen well before we reached 100. They have offered no official statement to support these fears/hopes, but that may make it more effective.
Many fundamental considerations make an eventual bearish break highly likely over time. Fading confidence in the BoJ's stimulus influence has been a prominent driver that has been reinforced by the Dollar's own struggle with rate forecasts of late. Yet, in quiet market conditions, this theme likely falls short of the traction necessary to change the tide. However, risk views are always strong persuasion. If a definitive drop from global equities, high-yield assets and even speculative Treasury exposure were to develop; the cumulative weight on the carry would overwhelm any defense the central bank and government may attempt to mount. We focus on USD/JPY as the world watches its strain build in today's Strategy Video.
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