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Currency Analyst since 2010

USD/JPY: desperate Abe, weaker yen

By Elizaveta Belugina

During the past week USD/JPY was consolidative. Never the less it has managed to capture higher levels above 116.

The main topic of the week was whether Japanese Prime Minister Shinzo Abe calls an early election to delay the unpopular second sales tax hike planned on Oct. 2015. Japanese companies hope that the tax increase will be put off. Such expectations drive Japanese stocks up. As USD/JPY tends to follow Japanese stocks, it’s gaining as well.

Abe’s decision will be based on Japan’s Q3 GDP which is to be released on Monday. In Q2 annualized GDP fell by 7.1% – this is a very bad result. Such decline was caused by the first round of tax increase in April. This is a very poor result for the Abenomics policy. As a result, delay in the tax hike until April 2017 is the most likely scenario. In this case there will be parliamentary elections this December. This is a short-term positive factor for USD/JPY.

This outcome is already partly priced in by the overbought currency pair. This limits the extent of the potential move up. This weekend there will be a G20 summit and it may have an impact on the market’s risk sentiment.

Monthly USD/JPY chart shows that there’s resistance just at the current levels, but after that nothing really solid until 118 yen. The odds that USD/JPY shoots in this direction are high. At the same it’s been a very long time since the pair was so overbought. Thus there’s a strong risk on a spike up next week followed by a pullback down: as a tax hike is delayed, traders will fix their profits, because after all elections and a delay in fiscal improvement is a stress for the economy.

 

 

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