USD/JPY, Nikkei still under pressure after Monday

Market interest in Japan has fallen as autumn draws near and as external uncertainty has risen considerably since the PBOC's CNY reforms on 11 August amid heightened prospects for a Fed hike and subsequent market turmoil. The uncertainty manifested itself as a sharp risk-off move on Monday (24 August) when USD/JPY dropped 3.0% in one day or nearly 5% intraday.

It is believed, this USD/JPY  move was a combination of (1) a lack of confidence in policy makers, particularly in Asia, to stabilize growth and the market, (2) the unwinding of carry positions amid heightened uncertainty over the global economy, and (3) pricing out the Fed's September hike.

The lack of announcements by global policy makers to support the market could result in pressure on USD/JPY and the Nikkei 225 index (NKY) near-term at a time when concerns could increase over negative feedback from the equity market sell-off to the real economy. On the technical front, USD/JPY and NKY have formed a double top this summer with technical strategists painting a bearish short-term outlook. USD/JPY and NKY may face another dip without substantive policy measures as USD/JPY is retracing from the 24 August intraday bottom on weekly Ichimoku Cloud support. We will see whether it can successfully close above the key 200 moving average level on a weekly basis, currently running at 120.7, this Friday.

Uncertainty over global growth and the equity market has arguably increased, which currently matter most to USD/JPY and NKY, the short-term upside risk has yet to turn favorable after, over the medium-term horizon, USD/JPY and NKY can regain upward momentum. It is believed that, the USD can manifest its strength on the solid domestic economy as the dust settles and Japan catalysts in the coming autumn can draw market attention again, supporting the USD/JPY and NKY medium term and reducing short-term downside risk.

"We believe the same trio of catalysts as in 2014-politics, the BOJ, and fund flows could crop up again this year. We leave our USD/JPY forecast for September at 121 and for year-end at 125 and think the Kuroda put at around 115 remains in place despiteshort-term stress", says BofA Merrill Lynch.