Brighter prospect seen for USD/JPY
AS we approach the end of 2019, during which the Federal Reserve slashed rates three times over the course of a year, markets remain cautious towards whether there would be more downside risk for the USD next year. The series of Fed rate cuts that started since July largely caught markets by surprise as the general consensus at the start of 2019 suggested a possibility of the Fed raising rates gradually. Therefore, the drastic turn of events throughout the year placed strain on the USD, and this was most evident in the USD/JPY pair. However, for the new year, there appears to be light at the end of the tunnel, and technical indicators are pointing towards a brighter prospect for the USD/JPY pair.
Firstly, a "golden cross" candlestick pattern has occurred. This phenomenon occurs when the short-term moving average (50 EMA) crosses above the long-term moving average (200 EMA), this is deemed to be a bullish signal. In addition, prices have been well above the Exponential Moving Averages (EMAs), and the distance between them have been widening. This affirms that buying strength is present and that an upwards trend is on the horizon for the USD/JPY pair.
Secondly, an uptrend line has been forming since Aug 12. To date, prices have tested the support levels multiple times, and have been showing higher highs and lower lows. Using Fibonacci retracement, drawn from the April 24 high at 112.19 to the Aug 26 low at 104.45, it is noted that prices are currently at the 61.8 per cent resistance level. Should prices break above current levels, its immediate resistance will be at 110.52, at the 76.4 per cent Fibonacci level, presenting a 1.02 per cent upside potential. The Fibonacci retracement has been accurate thus far, with the levels proving to act as strong support and resistance points. Therefore, as there are no obvious signs of reversal, it suggests that prices would still have a tendency to trend higher.
Lastly, the Moving Average Convergence Divergence (MACD), a trend-following momentum indicator, further affirms that buying pressure is strong. The signal line is still above the base line, indicating that the bullish momentum is high. The 12-bar MACD indicator also does not appear to reverse anytime soon. This signals that the USD/JPY would continue an ascending trajectory.
On a fundamental aspect, recent US data are pointing towards solid economic growth. Apart from the gross domestic product growth showing improvement in the third quarter, there are also increasing signs that the US economy will maintain the moderate pace of expansion. In addition, there is no obvious evidence to indicate a possible recession. Also, the US economy is appearing to continue its upward march, while being supported by a strong labour market. Therefore, fears that have previously gripped the global financial markets are expected to eventually fade. Moreover, there has been increased confidence for a turnaround in the recent US manufacturing weakness, due to the stabilising of Sino-US relations.
Hence, we are of the view that should the current positive economic numbers be reported, the Fed is unlikely to continue its interest rate cutting cycle in 2020. This would in turn provide broad support to the USD.
On the other hand, the JPY may be in for fresh signs of weakness next year, as the latest Bank of Japan (BOJ) meeting minutes highlighted the diminishing return of monetary easing, and that fiscal policy may need to play a bigger role in battling risks to the economy. Hence, with Japan Prime Minister Abe unveiling a US$120 billion fiscal package, this may lead to further strain on the JPY. In addition, as the JPY's strength this year was sustained, mainly due to the BOJ appearing more hawkish than its peers, as it kept its rates unchanged. Therefore, should the BOJ decide to not only to take monetary policy action but also enhance cooperation with the government through a new fiscal policy in 2020, weakness for the JPY would entail.
Thus, the technical bearishness, coupled with the increasing probability of the Fed keeping interest rates unchanged in 2020, is expected to further fuel upside momentum for the USD/JPY. The immediate resistance will be 110.52 (1.03 per cent upside potential), while the next resistance is at 112.40 (2.75 per cent upside potential). Meanwhile, the immediate support will be at the 50 EMA levels.
Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.
