USD/JPY – BOJ Kuroda Unfazed By Low Capital Spending

Hourly Chart
USD/JPY Hourly" title="USD/JPY Hourly" height="712" width="990">The rally in USD/JPY hit an early snag this week as prices traded lower after hitting Channel Top during the first few hours of trading this morning. The bearish pullback was further fueled by lower than expected Capital Spending numbers released at 8:50 am Tokyo (1.5% Actual vs 3.6% expected), suggesting that Japanese economy is still relatively soft - firms are not investing for the long term despite all the supposed confidence arising from Prime Minister Abe's Abenomics initiatives. This decrease in Abenomics' effectiveness pushed USD/JPY lower as traders and speculators started to doubt if Abenomics will be able to artificially weaken the Yen further.

However, this is not a popular opinion, as we've seen USD/JPY trading higher slowly but surely in 2H 2013 despite the success of Abenomics being questioned all this while. It seems that most of the traders actually believe that BOJ and Shinzo Abe will simply introduce even more stimulus in order to achieve what they want, and that has and will continue to keep USD/JPY supported moving forward.

From a technical perspective, prices may also find support from Channel Bottom. Stochastic readings may be pointing down within a bearish cycle, but Stoch curve may similarly find support around the 30-40.0 levels (where previous trough has been seen). Hence it would not be surprising if we see both Stoch and price rebounding higher from here and usher in a push towards Channel Top once again.

Weekly Chart
USD/JPY Weekly" title="USD/JPY Weekly" height="712" width="990">
Of greater concern is the long-term bullish potential for USD/JPY. Prices are currently trading around the ceiling of 2013 between 102.5 - 103.75 with Stochastic indicator suggesting that bullish momentum may peak soon. As a large part of current rally has been driven by hopes for additional BOJ Stimulus in December, there is a huge downside risk lurking around should BOJ disappoints. In this regard, Kuroda's response today is interesting - the BOJ Governor said that he expects gradual increase in Japan capital spending in respond to the weaker than expected numbers released earlier. We could be over reading, but the tone suggest that BOJ may actually be comfortable with current pace of economic recovery (even though numbers are lower than what market expects). This would imply that a better than expected stimulus package in December may be less likely - increasing the downside risk of USD/JPY further.

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