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FxWirePro Call Review: Weak yen might challenge our bearish outlook for Nikkei

Back in February this year, in an article named, “FxWirePro: Sell Nikkei 225 1:3 risk reward ratio”, available at https://www.econotimes.com/FxWirePro-Sell-Nikkei-225-13-risk-reward-ratio-1158298 , we suggested, “The Japanese benchmark stock index Nikkei225 reached several of our bull side targets like the ‘another 12 percent rise call in October 2017’; here is the link, http://www.fxwirepro.com/fxwire/popup/newsPopup?id=748952 however, our calculations suggest that the tide might finally be changing direction. The global stock market selloff that rattled investors’ nerves just a few weeks back exposed how years of complacency (since 2012 in case of Nikkei) could lead to violent stock market moves within days or weeks. We believe that the selloff might not be over and Nikkei could go a long way down.”

We also highlighted the reason behind the bearish outlook,

  • The rates are moving higher, especially in the United States. A weaker dollar is likely to add to it. A higher risk-free rate in treasuries means higher cost of capital for stocks and higher discounting rate for equity analysts.
  • The recent reports published by the U.S. Commerce Department with regard to Aluminum and Steel imports show just how serious the Trump administration is in curbing the trade deficit of the United States. Check out the reports at Commerce.gov
  • In addition to that, it is quite clear that the course of monetary policy has changed with more and more central banks signaling a shift.

For the trade, we suggested, “Our calculations suggest the Nikkei, which is currently trading at 21828 (JPN225) is likely to decline to as low as 15300 area. We recommend a stop loss near 24200.”

In a follow-up review, https://www.econotimes.com/FxWirePro-Call-Review-Maintain-short-positions-in-Nikkei225-interim-targets-added-1219450 we added interim targets;

Target 1 - 20030

Target 2 - 19570

Target 3 - 17450

Target 4 - 16080

Since that review, the nikkei225 (JPN225) has recovered to 23000 area and facing selling pressure this week. The index (JPN225) is currently trading at 22550 area. Though we are maintaining our bearish outlook in Nikkei, we fear that a substantial weak yen stemming from the loose policy of Bank of Japan (BoJ) going forward could challenge or bearish outlook.

One of our models is suggesting that if Bank of Japan (BoJ) doubles down on loose monetary policy, yen could weaken to as low as 120 per dollar. We have recently revised our bullish long-term outlook on the yen to neutral. In such a case, Nikkei would defy selling pressure and could break into a new high above the last peak in January around 24150 area.

 

 

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