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Asset Watch
Tuesday, August 6, 2024
It’s been a nightmare for the Big Tech bulls in recent weeks as NASDAQ 100 heavyweights have come under immense pressure. And with fears of an economic slowdown increasing investors’ anxiety, market conditions have shifted dramatically. However, while the 2024 leaders struggle to remain afloat, could a laggard like the yen be the perfect remedy?
Pushing its overnight lending rate to the highest level since 2008, the Bank of Japan (BOJ) has finally joined the rate-hike brigade. As the Fed hints at a rate cut in September, the dove-hawk divide has flipped upside down.
In a nutshell: higher interest rates benefit a country’s currency. The Fed has out-hawked the BOJ for the last few years, so the USD/JPY has been a major beneficiary. Yet, with BOJ Governor Kazuo Ueda noting that if inflation remains troublesome “we would of course take the next step” and raise rates further, the JPY looks fundamentally attractive.
The recent sell-off resulted in the USD/JPY breaking below its October 2022 and 2023 highs (marked by the horizontal white line) and the 10-month moving average (the blue line). As a result, support has become resistance, and the outlook remains bearish so long as the USD/JPY trades below both levels.
Another bearish indicator is the monthly RSI divergence (the blue line at the bottom). If you analyse the vertical white line on the left side of the chart, you can see that the USD/JPY made a higher high in June 2007, while its monthly RSI made a lower high.
Likewise, the vertical white line on the right side of the chart shows how the currency pair made a higher high in July 2024, while its monthly RSI made a lower high. Consequently, the setup is similar to what preceded the 2007-2011 collapse.
To trade it, you should monitor the 10-month MA. It’s been resistance in August and should continue to decline as time passes. Therefore, a USD/JPY short position is justified if the FX pair trades below the metric.
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