USD/JPY: Last week's recap and this week's outlook【Naoto Sakatani Practical Trading】
"USD/JPY: How was the week starting August 14?"
USD/JPY started last week at 109.09 and finished at 109.17.
It was a see-saw week.
During that period, after hitting a high of 110.94 as tensions between the US and North Korea eased,
the July FOMC minutes emphasized concerns about disinflation,
and expectations for rate hikes faded,
as President Trump dissolved his two advisory groups,
raising concerns about the Trump administration's policy execution,
and it fell to 108.59.
On the 14th,
it opened slightly stronger at 109.09 from the previous Friday's close of 109.15,
which was the day's low. Since the low floor was confirmed on Friday the 11th,
the week opened with buying on the 14th.
Against a backdrop of rising stocks and higher U.S. long-term yields,
the 14th high rose to 109.80 intraday,
and it closed at 109.61.
The first provisional estimate of Japan's Q2 GDP released in Tokyo time
significantly exceeded expectations at +4.0% versus +2.5% forecast,
but the market reaction was limited.
On the 15th,
it opened at 109.63 from the prior session's close,
and again, it posted the 15th's low of 109.59 early in the session.
In the early Tokyo session,
reports that North Korea would cancel its plan to fire four missiles toward Guam
were reported,
and with the retreat of geopolitical risk between the U.S. and North Korea,
dollar buying dominated, and with the NY session,
strong U.S. retail data also lent further dollar buying,
pushing the day high to 110.84 and the close to 110.67.
On the 16th,
it opened at 110.66 from the prior close,
carrying over the prior day's dollar-buying tone into the NY session,
and gradually rising to a high of 110.94 on the 16th.
However, the upside was capped as the 111.05 four-day high came into view,
and buying tailed off.
Thereafter, President Trump announced the dissolution of his advisory boards—the
Manufacturing Council and the Strategic and Policy Forum—
which heightened uncertainty about the outlook for the administration,
and with the July FOMC minutes signaling inflation concerns,
the dollar dropped sharply,
staging a low of 110.02 and closing at 110.18.
On the 17th,
it opened at 110.18,
and the euro's weakness helped push the high to 110.37,
but the downside remained pressured,
rumors that the NEC chair would resign circulated,
accelerating risk-off flows,
and although the resignation rumors were denied later,
the market remained unsettled,
dropping to 109.44 and closing at 109.56.
The Barcelona terrorist attack weighed on stocks and added to selling pressure.
On the 18th,
it opened at 109.56,
and the selling tone persisted into the NY session,
with a session low of 108.59, the lowest since April 19,
and reports that Steve Bannon, Trump's senior adviser and chief strategist, had been ousted circulated,
which briefly sent the price higher to 109.60,
but by the close it had faded,
and the close was 109.17 as the Dow fell again.
"USD/JPY: What will the week from August 21 bring?"
Key points: the focus is on Chair Yellen's speech at Jackson Hole on the 24–26.
If the September FOMC signals the start of balance-sheet reduction, the market has priced it in, but given inflation concerns, views on further hikes are mixed; so if Yellen signals early U.S. rate hikes, the dollar would strengthen.
However, if inflation slows and suggests pushing back the balance-sheet normalization beyond the October FOMC, the dollar would weaken.
Meanwhile, with uncertainty about the Trump administration's policy execution and growing market concern,
the removal of Bannon last Friday does not necessarily settle doubts about the administration's ability to implement economic policy,
so the dollar's upside is likely to be limited in the near term.
Three risks to watch for September:
1. The U.S. federal debt ceiling deadline on September 29, raising the possibility of a U.S. debt default
2. The September 30 deadline for the 2018 fiscal year spending bill, with the risk of a government shutdown
3. And before that, the need to pass a tax reform bill; as Congress returns after summer break on September 4,
keep an eye on the congressional move.
CME FX futures positioning: as of August 15
（Aug 15） （Aug 8） （Aug 1）
Yen ▲-77,492 ▲-95,813 ▲-112,196
Euro ＋79,267 ＋93,685 ＋82,637
CFTC IMM:
Net yen position by short-term speculators and investors
Long positions declined substantially this week.
The all-time high net yen short position was,
-188,077 on June 26, 2007.
Chicago VIX index:
An index measuring investors' fear levels,
14.26 (up 1.29 from the previous day)
rose from the low 10s on August 9 to the teens on the 10th,
then weakened afterward.
Dollar Index:
An index showing the dollar's moves against major currencies,
93.43 (−0.19)
gradually touched new lows through the week.
Last week was in a range around 110.50.
Aug 14: 109.07 – 109.80
Aug 15: 109.59 – 110.84
Aug 16: 110.02 – 110.94
Aug 17: 109.44 – 110.37
Aug 18: 108.59 – 109.60
Technically, on the daily chart, Ichimoku shows:
Leading Span 1 rising to 112.46
Leading Span 2 rising to 111.65
Base line (Kijun-sen) falling to 111.09
Conversion line (Tenkan-sen) falling to 109.78
The actual price line closed at 109.17 on the 18th.
Thus,
Technically, since July 21, the relation "price line < conversion line < base line" has existed, indicating a "bearish era,"
the lagging span has also fallen well below the price line.
On a larger scale, looking at the monthly chart,
from the October 2011 low of 75.33 to the June 5, 2015 high of 125.85,
the rise is Wave 1,the decline to the June 24, 2016 low of 98.90 is Wave 2,
and now we are in Wave 3 up from there.
The upside targets in this case are
NT ＝ 98.90 + (98.90 − 75.33) = 122.47,
N ＝ 98.90 + (125.85 − 75.33) = 149.42,
V ＝ 125.85 + (125.85 − 98.90) = 152.80,
E ＝ 125.85 + (125.85 − 75.33) = 176.37,
and these are the projections.
In the mid-range, on a weekly basis,
from the year-ago low of 98.90 on June 24 to the year-ago high of 118.66 on December 15,
Wave 1 is the rise,
and then the decline to the April 17, 108.12 low this year is Wave 2,
with Wave 3 now under way and likely continuing higher,
so the upside targets are
NT ＝ 108.12 + (108.12 − 98.90) = 117.34,
N ＝ 108.12 + (118.66 − 98.90) = 127.88,
V ＝ 118.66 + (118.66 − 108.12) = 129.20,
and these are the projections.
In the near term on the daily chart,
1. On July 11, it rose to a high of 114.49,
and by surpassing the previous May 10 high of 114.37,
the year’s highs of 118.66 (Dec 15, 2016) and 118.61 (Jan 3, 2017),
as well as 115.50 (Mar 10, 2017) and 114.37 (May 10, 2017),
the pattern of rising highs that had been declining since the start of the year changed,
with the July 11 high of 114.49 marking the turning point.
the ongoing down move could extend to 108.59 on August 18,
below the previous lows of 108.80 (June 14) and 108.71 (Aug 11),
potentially testing the 108.12 level from April 17,
holding somewhere near 108.12 and turning higher to test the 114.49 high from July 11,
or follow a different path; this is the moment to assess which path is unfolding.
3. Therefore, for now,
we should view the rise starting from the April 17 low of 108.12 as the primary wave (N-wave).
From the April 17 low of 108.12,
the rise to 114.49 on July 11 is Wave 1,
and the subsequent move at the current level suggests Wave 2 is under way,
with the ongoing pullback possibly representing Wave 3 of the rise.
Now the focus is on identifying the downside target of the ongoing Wave 2.
5. In this Wave 2 that began at the July 11 high of 114.49,
the three downward waves are visible within it.
If we assume the basic downward wave (N-wave) starting from July 11, 114.49,
the decline to August 11's 108.71 would be Wave 1,
the subsequent rise to August 16's 110.95 would be Wave 2,
and if the ongoing pullback is Wave 3,
NT ＝ 110.95 − (114.49 − 110.95) = 107.41,
V ＝ 108.71 − (110.95 − 108.71) = 106.47,
N ＝ 110.95 − (114.49 − 108.71) = 105.17,
E ＝ 108.71 − (114.49 − 108.71) = 102.93,
and these are the projections.
Key point is that the central value of the move is seen at 111.50,
so even if it presses down, it won’t break below 108; a floor at 108 is expected,
and a return to 111.50 is anticipated, followed by an upside toward 115,
since 115 = 111.50 + (111.50 − 108).
In other words, as long as the central value 111.50 governs the market,
the downside target is around 108 and the upside target is around 115.
Thus, the current pullback would likely find support near 108,
and then rebound to test 115.
The key is that after reaching 115, if the Wave 3 of the rise begins as shown above,
the upside targets would be 115.05 (N) and 120.62 (E),
and the question remains whether they can be reached.
In terms of wave momentum,
1. Reaching the N value is a minimum condition,
2. Reaching the E value is a sufficient condition.
Upside targets are,
1. The downtrend conversion line at 109.78,
2. The downtrend baseline at 111.09,
3. The Leading Span 1–2 in the 111.65–112.46 range,
4. The July 11 high of 114.49,
5. The up-wave targets from the 108.12 April 17 low to test these targets,
as described above.
Downside targets are,
1. If the central value 111.50 holds, the downside limit is 108.00.
2. The key is whether 110.00–112.00 can hold.
3. And from the 108.12 low of April 17,
