Yen Tumbles Against Greenback to Fresh Lows, and Poised to Test 124

The USD/JPY surged to a new 6-year high, amid a strong Japanese stock market and robust US economic data. The move comes after Japan’s PM Abe said that the intended second sales tax hike will be delayed, according to government sources. In an interview with the Handelsblatt newspaper, The Fed Fischer has also said that rates could rise in the U.S. before summer 2015, which is when markets are currently expecting.

The Yen was down against all of its counterparts, as interest rate differentials continued to fall, as traders await additional Bank of Japan asset purchases. The U.S. and Canada’s bond markets are closed for Veterans and Remembrance days respectively, which will make for quiet trading in fixed income and currency markets. Wednesday’s BoE inflation report, as well as the U.S.’s Retail Sales reported scheduled to be released on Friday, along with European Q2 GDP numbers, will drive the market for the balance of the week.

The ECB’s Mersch said the ECB will be ready next week to start ABS but there is growing conviction that ABS and covered bond purchases won’t be sufficient to widen the central bank’s balance sheet to an extent that would bring the balance sheet close to EUR 3 trillion. Given the success the US had with its bond purchase program it should only be a matter of time before Europe begins a full scale QE program similar to the one announced by the BOJ last week.

The monthly chart of the USD/JPY paints a clear picture of the direction of the currency pair as well as the next level of target resistance which are the highs made in mid-2007 near 124. Momentum on a monthly basis is positive with the MACD (moving average convergence divergence) index generating a buy signal. This occurs as the spread (the 12-month moving average minus the 26-month moving average) crosses above the 9-month moving average of the spread. The only caveat is that the RSI (relative strength index) is printing a reading of 80, which is above the overbought trigger level of 80 and could foreshadow a correction.

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