USDJPY: What's Next Ahead Of Fed ?

Junk bond and Oil worries fading Fed hike probability in Dec ??

Looking at the chart, USDJPY (CMP: 120.90) has strong support around 120-119 and consecutive closing below that may target 116-114 area in the near term.

On the upside, sustain above 121.50-122.50 area, it may target 124-126 (123.65-125.80) in the short to medium term.

Over all range of USDJPY might be around 116-122-126 in 2016 (FY:17) and 122 may be an equilibrium rate for BOJ, keeping in mind Japan's overall domestic economy, inflation & export competitiveness and it will adjust its QQE accordingly with close co-ordination with Fed & ECB (balancing act).

For the last two days USDJPY and S&P500 fall significantly on junk bond and oil worries. As par reports, there were defaults in some junk bond redemption requests and many more may be in the lines.

Also, there is a market buzz that US congress may lift the 40 years old ban on export of its oil as a package of its spending and tax measures (but its not finalized as par DJ reports). 

This will be good for USD & US trade balance, but may be more bad news for oil, though as par some report, demand for oil outstrips supply in the last few weeks after a long time.

Below $35-32, crude oil may fall further to $28-25-20 and if sustained there for mid to long term, many oil producing companies will force to shut down as their average cost of production may be somewhere between $25-20 and this may cause severe credit defaults in the financial system (oil bonds will become junk bonds !!).

This scenario of junk & oil bonds, may remind Fed about the 2008 sub-prime housing crisis & subsequent credit defaults. Thus Fed may also postpone Dec rate hike to delay it towards Feb-Apr'2016 for further assessments of the real situation.

FFR is now indicating Dec Fed rate hike probability of around 72% from previous high of  78%.

On the other side, if Fed does not act this time, it will be a question of credibility on Fed and in future, market may not believe in Fed at all and it may also be interpreted as "lack of confidence" on the part of Fed on US/Global economy. USD will be again sold off heavily and that's what Fed may exactly wants at this moments as too much strong USD will become a headwind for US economy also.

This may be really a catch-22 situation this time for Fed !!

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