By: Andrei Tratseuski
The growth in Japan has put a pressure on the risk appetite in London Session. The Yen climbed to 85.20 following a much lower than expected reading. Fears of the world’s third largest economy slowing down into the second quarter of the year prompted Yen to once again act as a safe heaven.
With the latest reading of the Chinese and Japanese economy data, we finally have seen a predicament coming for years: China has overtaken Japan as the second largest economy in the world. Japanese economy grew at a timid 0.4% pace in the second quarter, coming well below the estimates of 2.3% annual pace. With deflation still plaguing the nation and GDP possibly falling in a negative territory in the second half of the year, investor’s and economist’s fear for the worst. The worst case scenario on the table for Japan is a stagflation, when deflation and negative growth both weight down the economy. There are not too many solutions, when the problematic circumstances arrive. Nonetheless, the government is battling hand and fist to avoid the undesirable.
First and foremost, Japanese government is participating in the quantitative easing program. Quantitative easing is fiscal and monetary actions to jump start the economy through artificial measures. Secondly, the newly elected government is proposing to alter the economy. The officials are attempting to add growth to the economy internally by creating a greater demand domestically from a consumer. In turn, the Japanese government is hoping that the will be capable on simulating the same economy that the United States has. In short, Japan wants to be consumer driven economy, not export based economy. There are many advantages and disadvantages for this, yet in order to circumvent to this they need to raise the value of the currency. By raising the value of the currency, the demand internally will finally originate as it will be cheaper for the consumer to purchase goods. The government in turn is risking a lot, persist the inflation and continuing to down weight the economy as corporate businesses fail to make adequate profits.
So for the time being, the Yen has a lot of pressure on heading down further. The only obstacles on its weigh are positive readings from other economies which may prompt risk appetite frenzy. Currently, we will turn our attention to 1-Hour chart, where the USD/JPY currency pair is drastically oversold. The Money Flow Index is certainly in the oversold territory, while the Volume in the Hammer Candlestick formation was rising. The following suggests that the bulls and the bears are battling for that ground. With less money pressing on the US Dollar, we may see a quick relief rally to the upside. Currently, we expect for the USD/JPY to jump to 85.75, a 38.2% Fibonacci Retracement of today’s low and yesterday’s high before turning again to the downside. Nonetheless, with a tremendous downward trend the pair might take us below 85.00, before any reversals can originate.
