BoJ Need To Assess The bigger Picture Before Easing
The Yen is starting to become problematic for the Japanese economy as both inflation and consumer sentiment continue to decline. Inflation currently sits at 0.5% (excluding the sales tax hike and food prices) and may even head into negative territory. The reason why consumer sentiment has fallen is a weak yen, and confidence will likely follow the currency on any further downward moves. This is the current concern the BoJ has – it is hesitant to ease policy further as the Yen will further weaken. Inflation has reached such low levels in no small part due to plummeting commodity prices, especially oil. Plunging commodity prices should be a boon for both consumers and producers via lower prices and lower costs respectively, thereby increasing the likelihood of cost-push inflation.
Moreover, prices are starting to outpace wages so with a weaker Yen consumers are less able to buy goods, thereby reducing growth and subsequently decreasing the money supply in the economy. As a result, the BoJ are likely to keep monetary policy unchanged for the time being. Further weakening of the yen will further reduce consumer sentiment and supress wage growth, pushing the BoJ away from its 2% target inflation rate. In addition, the BoJ needs to assess the bigger picture; China, Europe, Australia and Canada have adopted an easing style and this may trigger a global currency war. The BoJ should be wary of this as this could lead to heavy currency devaluation and may result in Japan heading back into recession.
The world is praying that the Fed won’t raise rates as it would increase their borrowing costs substantially. Approximately $9 trillion is the amount in loans owned by non-banks outside the US. Emerging markets debt is in US$ and thus a rate hike will damage growth for these countries. In the current climate, the Fed is unlikely to raise rates until Q2/Q3 of 2015 while it awaits more positive data and an improvement in global outlook. It is worth noting that a rate hike may indeed be good for countries that are easing monetary policy as their goods will become more competitive. In addition, demand would pick up as US producers and consumers will be able to buy more of their products.
The pair is currently trading in a sideways market between S1 and R1. S1 appears to be a strong support level, having been tested twice. Additional support may be found at S2. S2 had been a resistance level prior to the break that now sees it acting as potential support (yet to be tested).
R1 presents a strong ceiling for the pair, with two tests of resistance thus far failing to break out. Further resistance lies at R2, having been tested twice though in October 2002 and December 2002 respectively.
Technicals: RSI (Relative Strength Index) and MAs (Moving Averages)
• The 50-day MA is starting to flatten indicating a loss of momentum in the short-term. Further, the 200-day MA is trending upwards indicating gain of momentum in the long-term. The 200-day MA and the 50-day MA will provide additional support and resistance to the pair respectively.
• The RSI is expected to be range bound between 30 and 70 if the current sideways market continues. A break of 63.79 may release bulls in to the market.
In the short-term, the pair is bearish. We expect more negative data to come out from the Japanese economy due to the global slowdown. In addition, we expect the BoJ to keep monetary policy on hold to avoid a currency war and revive consumer confidence. The US is in a much better situation, and is unlikely to raise rates. However, positive data is likely to ensue and will help the US$ rally higher.
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Ajay Pankhania is a part-time Technical Analyst at Accendo Markets. You can find out more about CFD Trading with Accendo Markets or download your free research trial, and get access to exclusive trading data. Follow me on Twitter at https://twitter.com/AjayPankhania
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