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Citi Warns "The Land Of The Rising Sun Is Setting"

In the "land of the rising sun," Citi FX Technicals group warns, the sun also goes down sometimes. The present set up on the monthly and daily charts on USDJPY suggests it is time to be cautious, with real danger that we could be 'on the cusp' of a material correction lower for the first time in this 3-month rally. A move as low as 105.50 is not out of the question and that is terrible news for Japanese stocks and Abe's approval ratings.

 

Via Citi FX Technicals,

Given the magnitude and speed of the USDJPY move last month it is worth looking at the long term “log” chart for guidance. When we do, we are a little bit cautious in the near term.

Why?

Our target for the end of 2014 has been around 110.50-111.00 and the speed of the move in the last 3 months has brought us close to that range quicker than we would have expected.

There is major resistance above here on this chart from 110.34-110.66 (76.4% pullback of the 2007-2011 fall, horizontal resistance from the March-August 2008 bounce and trend line off the 2002 and 2007 peaks.)

In addition, as we have surged higher last month there is a real danger that we now see triple momentum divergence on the monthly USDJPY chart which could suggest a material correction.

Add to this the rise in “EM” jitters, “Equity market” jitters , “Newport Beach” jitters and it seems only a matter of time before we hear a crescendo of “risk off” comments- (not traditionally good for USDJPY)

(In August-October 1998... a period we are very focused on historically the 2 prongs of concern were Russian default and LTCM leverage…..history does not repeat but it often rhymes)

It seems to us that it may be a good time to exit JPY short positions and let the “dust settle” for a while”

October 2013- Jan 2014: (Q4,2013)

  • Up move in USDJPY begins in the 2nd week of the 2nd month of the quarter
  • Rally peaks on the first full trading day of the next quarter (02 January)
  • Rally is 889.5 pips over 86 days
  • Correction begins on the first full trading day of the new quarter as USDJPY posts a bearish outside day at the peak of the up move.
  • This sees the Q3 rally being corrected by 50% before USDJPY bottoms out

July 2014- Oct 2014: (Q3, 2014)

  • Up move in USDJPY begins in the 2nd week of the 2nd month of the quarter
  • Rally peaks on the first full trading day of the next quarter (01 October)
  • Rally is 902.5 pips over 83 days
  • Correction begins on the first full trading day of the new quarter as USDJPY posts a bearish outside day at the peak of the up move.
  • If we were to see the Q4 rally being corrected by 50% before USDJPY bottoms out that would suggest a move to 105.48, possibly over the next month.

This last leg up has not had yield support

Weekly chart is showing an evening star like pattern very similar to that seen as the Nikkei peak at the end of Dec 2013 (Same point that the USDJPY rally was close to an end)

The rise in implied volatility seems to have paused (3 month) 3 weeks ago.

As in 2012-2013 that rise in volatility gave a good signal of a potential break higher in USDJPY

In Feb 2013 as the move up in volatility paused USDJPY initially continued higher before we saw a quick high to low correction of 4.12%. A similar correction this time off the present trend high of 110.09 would take us to 105.55 in USDJPY (The suggested corrective target in the daily chart above comparing this move to Q4, 2013.)

We also saw the rise in implied volatility stall ahead of the 2 Jan 2014 peak in USDJPY

All this suggests that at this point the short JPY trade does not look to have a great “risk versus reward” dynamic