My USDJPY call

This week, we've seen the USDJPY fall approx 2% from an open of 99.15 to 97.17 (a 198 pips drop).

It is interesting to observe how the USDJPY - stock correlation continue to play out. Historically its always been when stocks decline, USDJPY will too, as investors flock to the safe haven status of the yen.

This week, we did see a little bit of that, especially from yen cross selling (e.g. EURJPY, GBPJPY, AUDJPY) which depicts escape from the carry trade, but only for the first day of the week.

But cross selling did not prove to be convincing as the EUR, GBP and AUD all climbed higher later in the week but still USDJPY continued to fall.

Well, there isn't much carry trade to unwind in the first place as a lot of de-leveraging had been done in Q4 08.

It is too, especially counter-intuitive as Japanese investors are continuing to pour money out of the country to buy foreign bonds and stocks. The Japanese have a penchant for US securities.

USDJPY should go up in this case.

MOF data indicated that for the week ending 19 Apr 09, net outflow to foreign bonds and stocks were JPY 1,564 bn or approx USD 1.6 bn.

So why is there still downward pressure on the USDJPY?

I feel that the market was a little too quick to push the USDJPY up to beyond 100. Even though Japan's economy is suffering from the exports collapse and perceived fiscal deterioration (bond issue supported stimulus), Japan still stand in good stead as it should continue to run a trade surplus when the global economy recovers and will still be an investment income nation.

March trade surplus showed a rebound into positive territory from the previous months' crash.

Furthermore, MOF estimates that the market still has appetite to absorb the increased JGB issuance to fund the USD 140 bn stimulus package announced by Aso's government.

With the USDJPY yield differential as they are, there isn't much difference for investors to heavily favour USD based assets right now.

Things aren't so bad as it seems for the yen.

From a technical standpoint, the weekly chart below shows a three outside down candlestick formation which means bears having a strangle hold on the market. This means further downside is possible.

I fear that this piece is one week late because I noticed the outside red bar last weekend which means the bears are taking control but did not write. Nevertheless, as the week progressed, there seem to be more fundamental reasons for selling UDJPY. The ethos for my calls have always based on fundamentals. Technical analysis help me to confirm sentiments.

I favour selling on upward moves, near the 50 day moving average at 98. 40 (see chart below).

My call is for the next 2 weeks is:

To sell USDJPY from 98.40 - 99.00

Stop loss: 99.85 (above recent overbought moves)

Take profit: 95.50 - 96 (near neckline of recent double top formation)