FX Weekly: Japan Output Gap, EUR, XAU, SPX, JPY, GBP, AUD and NZD

BOJ proposed Governor Ueda hails from Southern Japan, and it is suspected new members Shinichi Uchida and Ryozo Himino were also born and raised in southern Japan. The current BOJ board under Kuroda is dominated by northern Japan members and adversaries to the economic experiments from the south since 1868.

The reported refusal of northern Japan member Amamiya to lead the BOJ is interpreted as the south’s refusal to cede BOJ control after 155 years to the more conservative northern members. The north would never adopt YCC and the enormous sums of money involved nor embrace the 1990’s USD/JPY peg to GDP and the money supply, negative interest rates.

The threat to southern members from the north is to tweak and then eliminate YCC in favor of more sound economics, such as Japan’s Output Gap, for example, to determine what an economy is producing in relation to what it may produce in the future. For Japan, the Output Gap is measured by Capital input to Labor’s production Vs. the Tankan Index.

By BOJ estimates, Japan’s Output Gap registers a current -0.06 and negative every quarter since the 2nd quarter of 2020. Since YCC and negative interest rates in the 3rd quarter of 2016, the Output Gap recorded 12 negative quarters vs. 13 positives. The 1990s experiments peg USD/JPY to GDP, and the money supply experienced 20 positives vs. 20 negative quarters to the Output Gap. Since 1983 and 159 quarters, Japan reported 95 negative quarters vs. 64 positives.

Since the 2008 market crash, Japan produced 40 negative quarters vs. 16 positive and time to adopt the latest experiment as YCC and negative interest rates. The normal procedure for the BOJ is to run the experiments roughly 10 years to its final conclusion when the policy crashes and burns, as was the time duration for the 1990s, the 1930s USD/JPY peg to Gold, and the early 1900s when the BOJ purchased Treasury Bills. Recall Japan’s Lost Decade.

The Week Ahead

DXY becomes overbought in the middle 105.00s and oversold at 103.90s from the current 104.50s. Expected is overall a good trade week against wider trade ranges.

USD/JPY’s big line break is located at 135.45, and overbought above translates to 137.00’s. The larger analysis of USD/JPY is a trading range of 800 pips vs. GBP/JPY and EUR/JPY at 4 to 500 pips. USD/JPY is not only the best trade for JPY cross pairs, but USD/JPY will continue to outperform JPY cross pairs.

JPY Cross Pairs

Not only are JPY cross pairs overbought as EUR/JPY, GBP/JPY, and CAD/JPY but severely overbought to BGN/JPY, MXN/JPY, CZK/JPY, DKK/JPY, KRW/JPY, PHP/JPY, PLN/JPY, RON/JPY.

GBP/JPY shorts at low 164.00’s targets low 163.00’s until the break at 162.68.

EUR/USD trades safely above 1.0560 and the bottom at 1.0400’s on a perpetual long-only strategy. Same story for GBP/USD, AUD/USD and NZD/USD.

EUR/NZD and GBP/NZD are aligned and short for the week as well as EUR/AUD and GBP/AUD. EUR/AUD shorts anywhere from high 1.5700’s to low 1.5800’s.

USD/CAD long-term targets are located at 1.3395, 1.3278, 1.3252, and 1.3134 on a break of 1.3156. No changes to USD/CAD targets since last reported in December.

USD/CAD’s lack of range movements forced EUR/CAD to 1.4200’s to 1.4600s over the past 3 months, GBP/CAD 1.6100;s to 1.6600’s, AUD/CAD 0.9100 to 0.9500’s and NZD/CAD 0.8300’s to 0.8800’s. All follow USD/CAD’s 400 pip moves over the past 3 months from 1.3600s to 1.3200’s. All are oversold on a short trade strategy, and all trade a range at roughly 133 pips per month and 166 for GBP/CAD.

USD/CAD’s overall problem is the failed mission to follow DXY lower yet the same fight to CAD/JPY as CAD/JPY targets are much lower than present exchange rates. The entire CAD complex is in disarray and forces small ranges until the CAD universe right size. A lower USD/CAD forces overbought CAD/JPY and CAD/CHF higher at a time when CAD/JPY and CAD/CHF are already severely overbought.

CAD/JPY long-term targets are 100.98, 96.51, and 94.76. USD/ILS and USD/NOK remain deeply overbought, and both pairs are the only USD pairs in the EM space worth a trade. USD/NOK targets 10.2621 and watch USD/SEK for shorts below 10.4736 to target 10.4518.

EUR Vs. EM is in agreement to oversell except to massive overbought EUR/RON and EUR/MYR. SPX's next lows are located at 3917.61 and 3904.98. SPX above has every ability to trade to 4220.00s.

XAU/USD is either 1991 or lower to 1794 and long again. As EUR/USD trades oversold, the complementary trade is long XAU/USD and XAG/USD.