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Yen Races To The Bottom As Euphoria Infects U.S. Stocks

By FxPro Financial Services Ltd (Alexander Kuptsikevich)ForexOct 15, 2021 06:24AM ET
www.investing.com/analysis/yen-races-to-the-bottom-as-euphoria-infects-us-stocks-200605193
Yen Races To The Bottom As Euphoria Infects U.S. Stocks
By FxPro Financial Services Ltd (Alexander Kuptsikevich)   |  Oct 15, 2021 06:24AM ET
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The S&P 500 index closed Thursday with the biggest gain in seven months, adding 1.7%. In a sharp move, the index managed to get back above the 50-day average and maintained its position above that line as of Friday morning.

The S&P 500 tests 50-day average.
The S&P 500 tests 50-day average.

Traders should pay attention to this level which has acted as support since November 2020 and turned into resistance in September 2021. The regular session and the weekend promise to set the tone for the next few days and even weeks.

Weak Yen Drives Japanese Equities

The Nikkei 225 added 1.7% in the trading session on Friday and surpassed the 29000 level and its 50- and 200-day moving averages.

The weakening of the Japanese yen against its major rivals is driving Japanese equities. The yen's weakening overnight fits well with the directly inverse relationship between its exchange rate and the demand for risk.

Low-yielding Japanese bonds fund purchases for risky assets such as stocks and high-yielding currencies. This adds to yen weakness as the trade balance shifts towards higher imports due to a jump in energy and metals prices.

USD/JPY soars to multi-year highs since 2017.
USD/JPY soars to multi-year highs since 2017.

Technical View

Having surpassed 114 this morning, the USD/JPY traded near the upper end of its trading range since early 2017. The pair is overbought on the weekly charts.

The same is true for GBP/JPY, which, having risen to 157, is testing its highest levels since mid-2016.

GBPJPY near 157 where it last traded before the Brexit referendum
GBPJPY near 157 where it last traded before the Brexit referendum

Conclusion

Since early October, the yen's dip has been rapid, and the move could gain momentum. In the coming days, we may see the sellers surrender on the rise above the turning points of recent years.

A further weakening of the Japanese currency would inflate the stock market's sails and further strengthen commodities and high-yielding currencies. This downwards momentum started at the beginning of October and is far from exhausted.

On the other hand, there are questions about its sustainability because massive bond placements by the US Treasury should be on the horizon, drawing liquidity from the market and supporting the demand for the dollar.

Yen Races To The Bottom As Euphoria Infects U.S. Stocks
 

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Yen Races To The Bottom As Euphoria Infects U.S. Stocks

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