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By HaleStewart January 14, 2014 8:29 am
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USD/JPY Tops Out For Now

Above is a daily chart of the USD/JPY chart.  After a run from ~97 to ~ 105 (a gain of a little over 8%), the pair has fallen back to the 200 day EMA, which is also supported by the candle tops from early May of last year.

The first obvious reason for the drop is a simple profit taking.  While the fundamentals of the trade are sill solid (the US is tighening, Japan is loosening), an 8% gain over a two month period is enough to make any traders take a profit, if only to lock in some gains.

But there are two underlying fundamental reasons for the drop as well. First, there is a natural skepticism regarding the overall efficacy of Abe's plans for Japan's economy.  While we saw some solid numbers out of the gate, slower growth is weighing on sentiment.  

As the above chart shows, overall growth has been positive, but also slowing.

And while the strong news and announcement of the Fed's tapering supported the dollar's rise, Friday's payrollls miss took a fair amount of wind out of the dollar's sales. 

Also from the technical side, consider the MACD's flatening before the pair's recent top:

So -- what's next?  From a fundamental side, we need to return to the previous dymanic that started the rally -- firm indication that Japan is still loosening and some indication that the taper is still on track.  For that to occur, we need  string of positive news from the US that adds upward pressure to the dollar.  Until we get that, expect at best a meandering move to the 105 level that will be very difficult to trade.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

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