The yen ending the week lower and gave USDJPY a big boost to close the week just below resistance at 102.81. The pair is looking more bullish as several signs on further yen depreciation remain on the horizon along with economic depreciation.
The Bank of Japan (BoJ) has indicated that new stimulus will be pumped into the markets, surpassing the current ¥70 trillion in bond purchases, in order to weaken the yen and increase consumer prices. However, the central bank’s primary goal of increase consumer prices is taking a toll on consumer spending. Household spending in February fell 2.5 percent ahead of the April sales tax hike of three percent. The increase in prices through inflation and taxes could be the one, two knockout for the Japanese consumer.
Some analysts believe the yen will lose its safe-haven appeal as Japan’s current-account deficit continues to expand. Economy Minister Akira Amari said earlier this month that a permanent current-account deficit would have an immediate impact on the credibility of bonds. Japan, previously, has three decades of current-account surpluses which allowed then to act as the world’s creditor. Unfortunately, the current-account deficit has nearly falling off the grid:
There is a worry that Japan would enter “fragile five” status, where Turkey, South Africa, Brazil, India and Indonesia has relied on foreign investments to fund their current-account deficits. According to Daisuke Karakama, market economist at Mizuho Bank, said “the history of the strong yen is the history of current-account surpluses.” Japan is one of five nations to announce a surplus every year since 1981. However, Karakama believes “yen depreciation was regarded as a good thing because it would boost the trade surplus, corporate earnings and stock prices. But I’m worried we’re nearing the situation where a weak yen benefits nobody.”
USDJPY has seen significant support around 101.25 and most recently made a bounce in mid-March before consolidating on the nearest daily price action support of 102.00/05. Price action consolidated and then sprang higher on Friday’s sell-off of the yen. The week closed below resistance at 102.84, but sentiment has been increasingly bullish.
There has been a sharp uptick in RSI, currently 56, and +DMI. Both signal an increase in bullishness, while the ADX looks to begin flattening to turn upwards.
Price action will look to challenge the downtrend created by the 105.43 high at 103.30. If so, momentum will bring USDJPY to 103.90/104.
However, the safe-haven status of yen is a psychological one. If risk sentiment switches off, it might be second nature to buy yen. There is still a lot of risk floating out their, and the current-account situation may not play out just yet.
Look for support at 102.05.