In 1990 USDJPY went above 160.
In 1990 the Nikkei had risen to just shy of 40k for the first time
In 1990 the BOJ was raising rates
In 1990 the Fed started cutting rates
in 1990 the US-Japan yield spread narrowed sharply
In 1990 USDJPY fell from a peak of 160.20 to 123.75
All of the above suggests that we could see a continuation of USDJPY lower, a further narrowing of US-Japan spreads and potentially a lower Nikkei (as higher yields and a stronger JPY, feedback negatively.
However, in the short-term maybe some caution is warranted. USDJPY has just hit the 55-week moving average for the 3rd time in the last 12 months and we saw a material bounce on the other 2 occasions.
We have also just tested the 55-week MA on EURJPY at 162.33
Does this mean that these moves lower have run their course? No, far from it. But with the Fed today and employment data this week and the strong move lower we have seen there is a clear danger of some short-term profit taking.
That is exactly what happened on USDJPY in July 1990 yielding a bounce close to 500 points before lower again.
What about the big picture?
Today we will post a bearish outside month off the trend high on USDJPY with a close below 154.55 and also on EURJPY with a close below 167.53. There are also a number of other monthly reversals in play on JPY crosses (GBPJPY, CHFJPY, CADJPY, SEKJPY, NOKJPY, CNHJPY etc
That suggests that we could see extended losses towards 140 or below in USDJPY and towards 153 in EURJPY over time.
The US-Japan 10-year yield spread still suggests that USDJPY is too high despite the recent fall and should be below 140.
In addition, IF as expected US yields continue to head lower and the curve steepens that takes more of the upside potential away from USDJPY as with falling rates and a steep curve it starts to become more productive for Japanese investors to hedge USDJPY exposure
Between 1990 and 1992 the US yield curve steepened aggressively as the Fed cut rates from a peak of 9.75% down to 3%
As in 1990 the hiking by the BOJ and the strengthening in the JPY looks to be weighing on the Nikkei.
The present pattern is starting to look like a double top with a neckline at 36,733 and a potential target around 33,400. Channel support is met at 37,670
Bottom line is, that the underlying trend lower in USDJPY is getting increased building blocks supporting it...but short-term there seems a decent possibility that in the coming weeks there will be better entry levels for that trade than where we are today.
