Things have shifted rather swiftly in the last few days, and we are now at very high levels in the USD/JPY exchange rate, but the Nikkei 225 is yet to catch up. Before parliament dissolves tomorrow, it might be interesting to look at where we are from a technical perspective in both the Nikkei 225 and USD/JPY.
We have one update candle, but it doesn’t change the analysis materially. As you can see, we broke the lower areas of the trend I have been talking about previously, but have yet to make a significant new low. Instead we have been caught up in the upwards gentler-slope trend (which is questionably drawn given the resolution I had to use, it could need upwards shifting by up to 30 points) that so far looks to hold. If this analysis is correct, we will have a narrow range for the next 2-3 days of trading between here and the 17 500 level, before a breakout to either side. Before this line completely loses significance, we would need to see a drop to 200 points below the line, or in other words breaking 17 000 if it happens this week or early next week.
However, this gets really interesting when we’re looking at this with the perspective of the USD/JPY exchange rate.
This chart is arguably already a bit old (due to the data release out of the US shaking markets up a bit) but all the USD/JPY did was test the upper bound of the orange channel. We can see a strong rally that is gaining momentum, and doesn’t look likely to stop, which is in pretty stark contrast to the Nikkei 225! The USD/JPY is building gains, while the Nikkei 225 is stalling, and it is much more clear on these two charts. This raises a few very interesting questions:
Is the currency drop starting to moderate in the usefulness to the equity market, and imports price cost increases might potentially be damaging? (It doesn’t look that way given data from earlier today.) Is it simply a story of much greater resistance technically for stocks given that they have actual valuations, and breaking this would “uncork” a big rally? Is the market, in broader terms, pricing in more stimulus but less possibility for actual political reform?
It will be interesting to see if there are any news or press conferences tomorrow in conjunction with the Diet dissolution, because otherwise we might simply be at Abe’s discretion for when he feels like talking about reforms. December 14th is not very far away… At least the implied futures-spot spreads are up this evening, so maybe someone is looking at increased risk-free rates!