Updated: Mar 28, 2021
What's up Logikfx readers and LITA traders. This weeks analysis we've come across an interesting confirmation over the past couple months on our USDJPY idea release in October. Since October we've seen USDJPY fall just under 2% but now that we reassess the position we've highlighted that it could be the start of a great BEAR market for USDJPY.
USDJPY High Level Overview
Overall, the economic indicators are signalling a conensus that we should be looking for a short side position in USDJPY. The only indicators that are not are stock market performance and the Hedge fund positioning on the USD. Other than that we have a majority so should only be looking for short side positions in the next month or so.
Currency Strength Meter - Logikfx
The direction of the fundamentals have also started to shift in favour of a USDJPY short over the past couple months. We can see on the currency strength meter that the blue line USD has fallen into a negative score whereas the JPY has risen. This is identified in the crossover between 28/11/2020 and 05/12/2020! Since the crossover happened we can really focus on only looking to short USDJPY and filter out the noise that may make us try to be looking for longs. This is because on a domestic fundamental level, the economics behind the currency is suggesting a down trend is coming. What we need to do now is confirm that idea using our relative analysis in the rest of the blog.
GDP Differential Indicator
The next part of the analysis was to check on the current and forecast GDP growth rates of both the United States and Japan. This is done using one of our in house made tools the "GDP Differential Indicator". It pretty much simplifies the analysis and saves us a bunch of time copy and pasting data.
What the indicator is suggesting overall is that next years forecast on GDP Growth rates aren't looking great for the United States and according to the IMF Japan is actually looking to slightly outgrow the US by 0.2%. This creates a short bias overall on our indicator to use moving forwards and also agrees with our currency strength meter reading to short USDJPY in the upcoming months.
USDJPY Export Analysis Exxon Mobil
Carrying on from the previous analysis we're going to be including Exxon Mobil. A very interesting point to consider is that recently Exxon has been excluded in one of United States largest stock indices, this can and will affect overall price change in Exxon. However with no biases going forwards we've concluded that the negative correlation still occurs between Exxon and USDJPY a very strong one at that too.
This has creates a short bias overall because Exxon prices recently over the past couple months have increase drastically. This creates an opposite conviction to short USDJPY due to the negative relationship.
USDJPY Export Analysis WTI Crude Oil
The same analysis applies to WTI which is the crude oil prices, this again a large export in the US but also a large import from Japan. Since Japan don't collect any oil domestically they actually end up importing (buying) from others!
Therefore, it's really key to include WTI prices when analysing countries that export oil and Japan who buy most their oil.
What we concluded again was a very strong negative correlation. Generally as the orange line (WTI) goes up USDJPY goes down and vice versa. In the past couple months since the initial drop in oil prices it's actually recovered nearly to levels pre-covid. This creates a short bias on our USDJPY idea and confirms the directional bias from the currency strength meter.
USDJPY Export Analysis Toyota
Toyota is another important company to include within the USDJPY analysis. Main reason being Toyota is classed as one of the worlds top car manufacturing companies but also one of Japans biggest exports.
Overall you can see the positive correlation take place. Just look at the price of Toyota between 2010 and 2015. They're near identical movements! Only since 2017 has external factors started to deviate the relationship slightly. However, overall the past 10 years has maintained a positive correlation. That being said, Toyota prices took a huge hit during COVID but has no bounced back to higher levels.
This was the only indicator in our import export analysis to not agree with the overall direction, overall however we had a short side bias so we've gone ahead and marked it as green.
Interest Rate Differentials
The interest rate differentials have always been a key indicator in the analysis. One interesting point to highlight is that the huge fall in the differential seen earlier this year also saw USDJPY down trend for months. The actual level we're at in terms of differentials saw in 2010 price levels in JPY of below 85 which would be a huge downwards move if exchange rates were to fall that far too.
Overall, interest rates have stayed the same but have been on a falling trend so we've marked this as agreeing with the currency strength meter directional bias to be short!
USDJPY vs Stock Market Index (S&P500)
The stock market analysis was one of the key indicators which was actually marked as red. The main reason being? Stock markets have grown, weirdly. The quantitive easing efforts and fiscal stimulus has helped companies share prices soar. Will this last? Who knows, but what we can say for sure is that it's not agreeing with our USDJPY short which is why we marked it as red and not ready.
Overall however, we believe the USDJPY seems to be overpriced on a fundamental level, technicals could also suggest it's fairly high and could see prices drop to 2011 levels.
USDJPY Price Trend Direction
Overall the price trends on USDJPY are choppy, they've been congesting the past few years but are now breaking new lows as forecast in our previous analysis on USDJPY. This update further fuels that idea that USDJPY is looking like a key bear market soon. Thanks for reading the analysis, to support us you can like and comment what you found interesting or what you'd prefer!
Enjoy the analysis, stay safe over the festive period and lets make 2021 a great trading year together. Matt, Logikfx
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