USD/JPY Monthly Forecast and BOJ Preview

The best GDP quarter for Japan in 2 years was Q2 2014 as 1.6 printed from 2.0 Q1 then the down slide began to reach 0 in Q4 2014 and negative 0.9 and 0.7 in Q1 and Q2 2015. In Q 1 2016, GDP corrected to current 0.8.

Japan’s CPI negative Rate of Change at -0.4 quarter over quarters only matches Italy among the major nations at -0.3 and -0.1. CPI last reported negative 0.4 year over year and minus 0.2 quarter over quarter. Volatile food prices is clearly the main driver to CPI as the CPI Index reports 103.30 in all items but minus Food and energy then the index reports 101.6. A steel wall of resistance exists at 103.90 and 104.10, along the way to historic 40 + year highs and first ever seen CPI at 104.50 The bottom side at 100 and 101 represents a massive bottom and broke only a few times since the 1990’s. CPI range remains support at 100 to 101 and 103.90 and 104.10 on the topside.

Actual Inflation rates hovered between negative 0.1 to +0.5 since the early 1990’s. CPI will remain volatile in future quarters because overall CPI is at at its historic peak .

The Monetary Base rose May 28 from Y 3, 850,000 to current 4. 029,200. The Overnight Call Rate is not just oversold but to lower lacks any serious discussion as oversold achieved stratospheric levels from monthly averages 2 to 10 years. A drop in the Call Rate cannot sustain itself as the averages practically violates the laws of mathematics. The current Overnight Call Rate at minus 0.064 is actually positive 0.93 and trades just below the positive line in negative territory. Since the January cut by the BOJ, USD/JPY dropped from 121 and stands at current 102’s. The Call Rate trades above Europe Eonia, CHF Saron, DKK CD’s and Sweden’ Repo Rate yet below Fed Funds.

For the Call Rate to go higher and begin an uptrend, 0.01, 0.02 and 0.03 must break. Points 0.01 and 0.02 are the first lines of defense. The BOJ confronts 3 vital issues. CPI to high, GDP and interest rates far to low. Then comes the issue of USD/JPY far to low and JPY far to high. The bold move would be raise the Overnight Call Rate rather than embark on further stimulus that hasn’t worked for the past 8 years. Yet USD/JPY is low and oversold.

USD/JPY V DXY is a contained USD/JPY price near term. USD/JPY runs into a solid wall of resistance in the 106’s beginning at 106.80, 106.82, 106.96 then 107.14. Below exits solid supports beginning at 102.48, 101.61, 100.94 and 99.94. Reported points are all vital levels rather than everyday market supports and resistance.

To go higher, USD/JPY must break 102.48, 103.71, 105.59 then comes 106’s and many points in the 107’s from 107.14, 107.63 and 107.77. Above 107.77 then USD/JPY goes far higher.

USD/JPY current price at 102.01 is not only oversold but extremely low. Caution to shorts for the month.

Brian Twomey Inside the Currency Market,