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Japan Marginally Exits Recession

Accendo Markets
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The RBA decided to cut interest rates to 2.25% earlier this month in the wake of a slowdown in consumer spending, high Aussie Dollar and declining demand for commodities. Approximately 10% of Australia’s GDP comes from the mining industry and weak demand for commodities is likely to have a negative effect on GDP.

Cutting the interest rate may initiate a housing price bubble, as can be seen from the graph below.

Housing loan approvals have increased dramatically and are set to increase even more after the rate cut. In addition, the graph below shows how far property prices have rocketed:

This clearly indicates a shortage of housing and the RBA should be monitoring this situation very carefully in case a bubble does emerge.

Following a two-day meeting the BoJ have decided to hold monetary policy which was widely anticipated. Japan had recently entered a recession and now has managed to exit this phase with just 0.6% growth. The reason for this decline and marginal growth has been due to a lack of consumer spending. The Yen has been weekend so much that consumers are starting to lose confidence in the value of the Yen. However, a weaker Yen has boosted exports (see Figure 1) – just one of the results of policy easing.

Figure 1: Chart showing the External Balance for Japan (Source: BoJ)

Due to this lack of consumption and low oil prices consumer inflation sits at 0.5% (taking into account sales tax hike). Thus we do expect the BoJ to ease monetary policy in the coming months to meet their 2% target inflation rate.

The pair was in a strong downtrend, but has since rebounded off S1. The pair is currently trading in an uptrend with S1 appearing to be a weak support level, having been tested once. Additional support may be found at S2, which has also been tested once.

R1 presents a weak ceiling for the pair, with one test of resistance thus far failing to break out. R2 had been a resistance level prior to the break. The pair is yet to test R2 again as resistance level.

Technicals: RSI (Relative Strength Index) and MAs (Moving Averages)

• The 200-day MA has flattened indicating a loss of momentum in the long term. Additional resistance may be encountered at the 50-day MA and 200-day MA. The 200-day MA has made a bearish cross of the 50-day.

• The RSI is neither in overbought/oversold territory, but seems to facing resistance at 49.589, a break of this level may let the bulls out in the market.

In the short-term the pair is bullish. Australia is in a much stronger position than Japan in terms of the strength of the economy. This is both supported by the technical analysis and fundamental analysis. Low commodity prices are likely to remain subdued for a little while, but should start to head back to their true value. Once they do this, Australia should be back on track to achieve further growth.

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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 (@AjayPankhania) at https://twitter.com/AjayPankhania.

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