The Dollar to Yen Chart Speaks Volumes as to Where Markets are Headed
The yen has been sent through the roof against the US dollar and other major currencies as speculators scramble for their life-rafts.
The JPY has gained by more than 7% against the USD since the BoJ surprised financial markets by introducing negative interest rates on 29 January.
There are several reasons contributing to this. 2 year US yields have since declined by about 9bp as financial markets reduced bets that the Fed will raise interest rates anytime soon.
"This exerted downward pressure on USD/JPY. However the sharp decline in USD/JPY was more pronounced than justified by lower US yields. Safe haven flows, rising speculative bets and stop loss have all exacerbated the move," says Roy Teo at ABN Amro.
If it is true what they say about a picture telling a 1000 words, then technical analysts would say the current chart the USD/JPY speaks volumes:
It has got to be one of the most bearish images since the 2008 - 2009 crash.
Added to the fact that there is a rare double-shouldered head-and-shoulders pattern splayed across the top - we also now have a clear breach of the neckline.
Western Union’s Daily Market Update on Tuesday Feb 9, neatly summed up the forces shaping USD/JPY's bearish vision:
“Growing market unease over global growth and fading expectations for the Fed to boost interest rates launched the yen to November 2014 highs against the dollar.
“The ¥115 level was long considered Japan’s proverbial ‘line in the sand’ of tolerating yen appreciation.
“Now that that level has been breached risks have risen for some sort of response from Tokyo, such as jawboning to talk down the yen to help safeguard Japan’s export-driven economy."
Bottom-line: demand for the yen surged as fresh market turmoil sent investors fleeing to safe-havens, the yen being one of the most favoured.
As far as the chart goes, the break of the neckline is a very bearish sign, indicating the exchange rate will now probably fall all the way to the minimum expectation target at 110.20, which is the 61.8% extrapolation of the height of the pattern down.
The S2 Monthly Pivot, which is a solid support line is situated just below the current lows at 113.93, however, should be penetrated first before confirming further downside.
For an entry level, therefore, a break below the 113.30 would probably be sufficient to champion a continuation down to 110.20.
What About the Pound to Yen Then?
Meanwhile GBP/JPY is showing a bearish but markedly less bearish chart compared to its USD cousin.
The current lows are supported by the 200-week MA at 162.66.
On the daily chart there is a distinct lack of momentum on the second bear move lower over the recent week and a half.
The pair has also just fulfilled the target for the break down from the previous long-term ascending channel.
Nevertheless, the short-term down-trend remains intact, and in the absence of any strong evidence for a reversal the pair will probably either consolidate or move lower.
A clear break below 160.00, confirmed by a move below the 159.50 level would probably lead to a continuation down to the S2 Monthly Pivot at 158.00.
Slump in Coco’s Triggers Bout of Market Hysteria
The main source of concern on Tuesday appeared to come from a sudden plunge in the value of Deutsche bank’s Coco Bonds, which are an invention of the post-crisis era and enable a bank to borrow debt which has a ‘get out clause’ attached, so that if they get into financial difficulties, they don't have to pay back the debt.
Clearly the assumption is that this is highly unlikely to happen given the recent imposition of wider capital buffers, more post-crisis regulation aimed at averting a crisis and substantial help provided by the ECB.
"The source of current stress are Cocos, securities issued by banks to improve regulatory capital and see investors, not tax payers, suffer losses if important capital thresholds are breached," says Chris Turner at ING, "in return investors commonly received yields in the 6-7% area and this asset class was one of the best performers last year"
The nub of the problem for banks is profitability – current stress has been triggered by Deutsche Bank’s Q4 results last week and fears, since denied, that it would not pay a coupon on its CoCos.
"Over recent years banks have attempted to meet higher capital standards by issuing securities like CoCos or shrinking their Risk Weighted Assets," explains Turner, "current stress only points to more de-leveraging."
A Hydra-headed Beast of Risk
However, it would be a mistake to see all the risk as emanating from another euro-zone financial drama, as the news that China’s FX reserves had fallen by 100bn – presumably due to fleeing capital - further played into China-growth fears, and equity markets shrank world-wide on more generalised global growth concerns.
As Hantec Market’s Richard Perry noted:
“Concerns about global growth slowing down is the usual excuse, whilst the $100bn reduction in Chinese FX reserves is also a red warning light, however it is just a negative swarm of bear pressure through markets that is a real concern.
“This is resulting in an enormous flight away from anything risk based and into safe haven plays.
“The big bearish signals are now flashing with Dollar/Yen falling to its lowest in more than 2 years and gold continuing to make considerable gains.
“US Treasury yields also continue to slide back.”
Perhaps the most surprising bearish influence is talk of the possibility of a recession in the U.S, such as that reported by
Swissquote in their daily FX brief:
“The fear of a US recession is now increasingly palpable and markets are pricing this in.
“This is putting pressure on Treasury yields, indeed 10-year yields are very close to last year’s low of 1.6357%.
“Other major American indices, DJIA and Nasdaq 100 fell respectively by -1.1% at 16027 points and -1.59% at 3960.671 points.”
Indeed, in a recent note JP Morgan actually modelled in detail a scenario where the US economy fell into recession – and or the Fed decided to stop hiking rates during the current cycle.
