Nomura: Six Reasons to Sell USD/JPY

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USD/JPY has risen over 10% since Donald Trump’s Election Win, rising From 101.00 to 111.00, but the rally may be coming to an end argues one of Japan's leading financial institutions.

The USD/JPY pair is probably overstretched to the upside, say strategists at Nomura Bank.

“USD/JPY has rallied from 101 to 111 since President-elect Trump’s victory. USD/JPY’s performance in 2017 will clearly depend on his chosen policy.

“In the short run, however, we feel relatively bearish towards year-end for a number of reasons,” say Nomura.

The first reason is that the rally has been fuelled by investors unwinding Dollar shorts and opening Dollar longs, but, question Nomura will investors hold these longs into the new year without knowing what Trump’s policies are?

Nomura see a Federal Reserve December rate hike as having been fully ‘priced in’ as well as several rate hikes in 2017, they, therefore, see a risk that the December rate rise will be a ‘sell the fact’ event.

President-elect Trump will soon want to choose the next Treasury Secretary, and he, “will highly likely be asked to comment on the latest USD trends.”

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Due to Trump’s protectionist trade stance he is likely to have more leeway in making verbal interventions to bring down the value of the Dollar.

“Verbal intervention in our opinion will be much easier if done by a Treasury Secretary "prospect" not bound by the G7 rules,” said Nomura.

Their fourth reason is to do with Europe.

“The Italian referendum on 4 December may trigger concerns about European politics and financial stability. This may provide a good reason and/or opportunity to take profit on bank stock positions,” said Nomura.

The fifth reason they give as follows:

“The importance placed on the Abe-Putin summit in Japan scheduled on 15-16 December seems to be losing some momentum.

“President Putin seems less in need of economic support from Japan as it seems he may benefit from a friendlier US foreign policy.

“President Abe is giving up his desire to hold a snap election in January as his approval ratings are somewhat disappointing.

“Without a near-term election schedule he loses some of the political incentive to achieve a laudable agreement soon,” said Nomura.

The sixth reason is that the Bank of Japan (BOJ) is unlikely to make any further easing which would have the effect of weakening the Yen.

Nomura see a tough ceiling at 112.00 heading into year end and a good chance of a sell-off down to 106.00

Societe Generale Also See USD/JPY Gains Capped

Like Nomura, Societe Generale see a ceiling in the 112 area.

“USD/JPY has come up against last May highs of 111.40/112 which also happens to be an important projection for the pullback and the 50% retracement from November 2015 highs,” they say.

They also point to a technical indicator, the RSI, which measures overbought and oversold states as registering USD/JPY as overbought, and therefore unlikely to rise any further.

“Daily RSI is now testing a pivotal ceiling and is overstretched highlighting 111.40/112 as a crucial short-term resistance,” say SocGen.

They see a break below 110.10 as providing confirmation of more downside.

“A break below 110.10 will be an initial sign of retracement towards 109, the daily channel limit and the 23.6% retracement from lows formed earlier this month.

“Neckline of the double bottom formation at 107.65/107.50 will be an important support,” conclude SocGen.