NIKKEI225 Stocks Retreat on Fears of BoJ Hikes & Stronger Yen
Stocks in Tokyo feel the heat of Ueda’s words at the parliamentary hearing, affirming more rate hikes were necessary.
The initial reaction from the market had little impact on the rally. Since Ueda’s comments also came with the reassurance that more hikes wouldn’t happen while the capital markets were unstable.
However, the strength of the yen is limiting Japan’s export capabilities, and the companies with a major focus on exports. The USD/JPY has fallen from 146.22 after Ueda’s parliamentary appearance to 143.83 today.
This year’s rally in the NIKKEI225 was also fueled by a weak yen as well as export profits. The yen carry trade helped channel capital into Japanese stocks. As the attractiveness of the carry trade fades, so too does foreign investment into stocks.
Investors have to assess how well the Japanese economy can handle interest rate increases. The higher cost of consumption may drag internal demand.
At the same time, with rates coming down in the US, the yen will likely continue to strengthen and limit profits for exporting companies.
Technical View
The day chart above for the NIKKEI225 shows a bear market in a major correction. The previous 2 candles are small upside-down hammers. Too small to be significant as a reversal signal, but they are still telling of a possible change.
The last candle almost completed a 100% retracement to the level pre BoJ meeting (blue arrow). A total retracement indicates strength in the rally. But the market is still under the Ichimoku cloud, indicating bearish sentiment.
Looking at the RSI we can also see that this last leg higher hasn’t been driven by strong momentum. The RSI reached its high point yesterday at 55, indicating a relatively low momentum for such a long rally.
The market will find immediate support at 37,599 (red line) and resistance at 38,864 (blue line). Further support is at 36,675 (green line), while major resistance will be found at between 39,447 (purple line) and the cloud.
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