How Low Can GBP/JPY Go? Eyeing Brexit and Japan Intervention
Too much drama with the Brits these days, right? When will it end? How should you be trading British Pound Crosses? What the heck is up with the continued Japanese Yen strength?
Don't worry, I have an answer for all of the above. Let's check in with our famous five points of Invest Diva Diamond.
1- UK Economy Overview
A number of keywords come to mind when talking about the UK economy: Brexit, inflation, employment and growth. First let's look at the positive and neutral stuff:
- UK Unemployment rate steady at 11- year low: Unemployment in the UK remains at lows not seen since 2005. However, as always the speculators saw the glass half empty when the February 17th numbers came out and said "well, I was expecting the unemployment to fall even further. So you know what? Screw the British Pound. Let's Dump it." Mind you, the UK has one of the lowest unemployment rates in the European Union. Only Germany and the Czech Republic have a lower rate of joblessness, at 4.5 per cent.
- UK’s retail sales up by most in more than 2 years: British shoppers snapped up bargains in the January sales which drove the total sales volumes up 2.3% compared with December.
- UK Consumer Confidence also pretty high: Despite global worries, Britain's Consumer Confidence Index increased two points to +4 in January.
UK GDP growth rises 0.5%: Britain’s economy picked up pace at the end of 2015. On the downside, GDP growth for the year as a whole was down making this one a bit of a mixed signal.
So, with all these positive stuff, an Invest Diva might ask "then why the heck is Mr. Pound in deep S#!*?" Here are some factors:
- Global Turmoil: While the Brits are high and mighty, their neighboring countries or even the ones far far away are struggling. These struggles have cast a massive cloud on the UK growth outlook.
- No more rate hike talks? Mark Carney, the Governor of the Bank of England (BOE), said this month that an“unforgiving” global environment was likely to keep rates at a record low of 0.5% for longer. However, policymakers signaled that the economy could overheat if they waited much more than a year to tighten policy. So there still is a chance...But probably not within 2016
- BREXIT: There I said it: the top trending topic on Twitter beginning of this week. Pretty much the opposite situation comparing to the previous "exit" trend, Grexit (Greece being forced to exit the EU) this time the Brits want to exit the European union because they think they can do better without them. They even have set a date for a Brexit referendum: June 23rd 2016. Some think Britain's withdrawal from it EU membership is necessary because the bloc has gradually evolved in ways that don't always fully serve Britain's national interests on trade, borders and other areas.
**A Quick note for newbie Invest Divas: Britain has already opted out of the EU's monetary union, meaning that it uses Mr. British pound (GBP) instead of the euro, and the Schengen Area, meaning that it does not share open borders with a number of other European states.
Summary: While the UK economy on its own seems to be doing well, the market sentiment is forcing Mr. British Pound in the downward direction. We could expect a ton of volatility in the GBP crosses until June, on speculations of a Brexit. I have explained best trading practices when it comes to such sentimental market volatility with Invest Diva students during out one-on-one coaching sessions. Keep in mind that most FX brokers are pretty excited about the speculated volatility, because these are the times that most traders lose money --> brokers make money. So fasten your seat belts and do what an Invest Diva does best: ride the roller coaster for a long period of time and avoid listening to the market noise.
2- Japan Economy Overview
The Samurai spirit remains strong with the Japanese Yen, as the global worries continue to force investors to turn to the JPY for safety.
This is despite the lack of domestic growth in Japan ( Annual Gross Domestic Product, GDP, went down to 1.5% in 4Q from previous 1.8%) and the falling numbers for exports and industrial activities.
The strong Japanese Yen is certainly taking its toll on the exports too, because it lowers Japan's trading profit. All your favorite Japanese products like Toyota, Sony, and Wii can now be bought for a cheaper price and therefore those companies earnings slow down.
Bank of Japan tried to stop the Yen strength last month by introducing negative interest rate policies. It worked like a bandage on a deep wound. Many analysts are expecting BOJ to attempt another trick to make the Japanese Yen weaker. We could see a Quantitative Easing (QE) which could create another temporary solution for the ever strengthening JPY.
3- Technically Speaking
Now that we've crushed the fundamentals, let's see what the technical point of the Invest Diva Diamond suggests.
- Big Picture: Monthly Chart: The pair danced straight down to a strong support at 158 this week. Why is this level so important? First, it acted as a trend-changing resistance back in July 2009. Second, it falls right on the 50% Fibonacci retracement level. This is now a test on the power of the pair. Is it strong enough to break below this level? Or the 3-black-crows formed in the past three months were merely a pullback within the overall trend that started in 2012? After all, the pair still remains above the ichimoku cloud.
- Daily Chart Market Sentiment: We look at the shorter term time frame to check on the 4th point of the Invest Diva Diamond: market sentiment. And as evident on this chart, the sentiment is damn bearish at the moment. The pair tried to correct its losses in January when the Bank of Japan introduced negative interest rates, but was not able to break above, or even reach the strong resistance at 176.71. With this, only a massive and new BOJ intervention seems to be able to change minds of the bears.
4- Investing Strategy
As you can see, all points of the Invest Diva Diamond do NOT point at the same direction. Therefore, I have been recommending Invest Diva students to avoid short-term trades on this pair. In a long run however, considering the fact that the pair has dropped over 1500 pips, and the that a BUY rollover interest fee is positive for GBP/JPY, you could consider getting in a bullish position and wait-out the volatility until June.
Remember you need to maintain enough margin in your account so a massive move against you won't wipe out your account. These are precisely the stuff I'll teach you in our weekly investing coaching lessons. Here are the important long-term levels to keep in mind for GBP/JPY.
|Support Levels||Turning Point||Resistance Levels|