With central banks lining up to add stimulus in the face of a potential global pandemic, when will Japan act, asks Joe Perry.
An interesting weekly report came out of Japan early last Thursday, which said that Stock Investments by Foreigners fell by JPY ¥755 billion ($7.09 billion) during the week of Feb. 29 vs. ¥68.1 billion in the prior week. This is the largest withdrawal of funds from Japanese stocks since Sept.22, 2019. In addition, Foreign Bond Investment fell by ¥489.7 billion ($4.6 billion) during the week of Feb. 29 vs JPY +656.3 billion ($6.16 billion) a week earlier. However, the Japanese yen is still maintaining its “flight to safety” quality, at least until the Bank of Japan decides to provide further stimulus. Market News International reported that officials signaled Japan doesn’t need additional stimulus until USD/JPY falls sharply through 105.00. The Bank of Japan doesn’t meet again until March 18-19.
The U.S. Federal Reserve cut rates on Tuesday by 50 basis points to 1.25%. After the Japanese Government Pension Investment Fund (GPIF) was in the market during mid-February selling Japanese yen and buying counter currencies, USD/JPY began to tank, and fear of the Coronavirus began spreading around the globe. USD/JPY came off from above 112.00 to Thursday’s levels near 106.50. There is horizontal support near Thursday’s lows, but the bearish outside engulfing candle on the day (so far) isn’t showing much promise for the pair to bounce significantly. Next support is a rising weekly trendline near 105.50 dating back to mid-2016 (see chart).
Source: Tradingview, FOREX.com
The Reserve Bank of Australia (RBA) also cut rates this week by 25 basis points to an a new all-time low of 0.50%. On a 240-minute timeframe, the Aussie/Yen pair (AUD/JPY) broke lower out of the flag pattern dating back to mid-January and halted near the target of 70.00. Price bounced to near 71.50, turned lower, and formed a new pennant- like formation. Thursday, the pair broke lower again, moving towards target near 68.60. AUD/JPY must first break the previous lows of 69.40 on its way to target (see chart).
Source: Tradingview, FOREX.com
Finally, the Bank of Canada (BOC) cut rates Wednesday by 50 basis points from 1.75% to 1.25%, and they still have additional room to move if needed. The loonie/yen pair (CAD/JPY) has been moving lower from its highs of 84.75 in mid-February (the same time USD/JPY began moving lower). The pair has stalled at the 161.8% Fibonacci extension level from the lows on Feb. 3 to the highs on Feb. 20, near 79.50. If price breaks through here, it could move quickly to the lows of Aug. 26, 2019 near 78.50. First resistance is the lows from earlier this week near 80.00 (see chart).
Source: Tradingview, FOREX.com
Although the Bank of Japan hasn’t showed signs, they would provide more stimulus until their meeting in mid-March, there is always the chance they could intervene inter-meeting and provide support (as the Fed did). However, one must wonder how much more they can do, as they have been supporting the economy for more than 20 years. But, if the Bank of Japan wants the Japanese yen to weaken, they’ll need to do something soon!
Joe Perry holds the Chartered Market Technician (CMT) designation and has 20 years of experience in the FX and commodities arenas. Perry uses a combination of technical, macro, and fundamental analysis to provide market insights. He traded spot market FX and commodity futures for 17 years at SAC Capital Advisors and Point 72 Asset Management.
