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Japanese Yen Weekly Technical Forecast: Flash Crash May Have Been a Red Herring

Japanese Yen Weekly Technical Forecast: Flash Crash May Have Been a Red Herring

2019-01-07 02:45:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Talking Points:

- The flash crash in JPY-crosses ahead of the Asian session open on Thursday ultimately resulted in some of the most significant reversals ever seen in the history of FX markets.

- However, the only way the reversals matter is if global equity markets continue to rally. Otherwise, demand for the Yen will return quickly in another bout of risk aversion as seen over the past month.

- Changes in retail trader positioning suggest a ‘mixed’ outlook in the near-term for the Japanese Yen.

See our long-term forecasts for the Japanese Yen and other major currencies with the DailyFX Trading Guides.

Technical Forecast for the Japanese Yen: Neutral

The Japanese Yen has had a wild start to 2019. After the cash equity session on Wednesday, January 2, Apple produced a warning about demand for iPhones from China. The news helped triggering concerns about a major slowdown in the world’s second largest economy, with the US-China trade war pushing the global economy towards recession. This culmination of factors reignited couldn’t have come at a worse time: amidst Japan being on holiday, which produced even thinner liquidity conditions than normal during the North American-Wednesday to Asian-Thursday crossover. The final result: a flash crash in the JPY-crosses.

While the initial moves in the Yen flash crash were impressive – USD/JPY came within less than 3-pips from its 2018 low, which it ended last year over 205-pips away from, and AUD/JPY dropped all the way to its lowest level since May 2009 – none of them proved to stick. AUD/JPY’s reversal on Thursday, for example, was the single-largest move off the lows in the pair’s history.

The fact is, the scale of the reversals seen in the JPY-complex on Thursday – in AUD/JPY, EUR/JPY, GBP/JPY, etc. – may not matter when put into context of the news of the day. The commentary by Federal Reserve Chair Jerome Powell helped trigger the sharp move higher in equity markets, and the knock-on effect of improved risk appetite dragged the JPY-complex higher in the process. However, the only way the reversals matter is if global equity markets continue to rally. Otherwise, demand for the Yen will return quickly in another bout of risk aversion as seen over the past month.

EUR/JPY Price Chart: Daily Timeframe (April 2017 to January 2019) (Chart 1)

japanese yen forecast eur/jpy forecast

In the last weekly technical forecast of 2018, we outlined both bullish and bearish scenarios for EUR/JPY. For many analysts, including this author, EUR/JPY was designated as a top short opportunity for 2019. Already, given the scale of the Yen move this week, expectations have been met (and then some). The pair was able to clear out the 2018 low at 124.62 was easily broken early in the week, and price ultimately returned all the way to the rising trendline from the 2012 and 2016 swing lows, down at 118.62.

While the reversal has been impressive, an earnest look at various indicators suggests that momentum remains pointed to the downside. Both Slow Stochastics and daily MACD continue to trend lower in bearish territory, even if losses have been arrested by price action at the end of the week. Similarly, price is trading completely beneath the daily 8-, 13-, and 21-EMA envelope. With the daily 8-EMA quickly descending into the area around the May and August 2018 swing lows, this former support region (124.62/125.05) is quickly turning into major resistance which must be overcome before the reversal gains true legitimacy.

USD/JPY Price Chart: Daily Timeframe (December 2017 to January 2019) (Chart 2)

japanese yen weekly forecast usd/jpy forecast

In late-December, USD/JPY saw price move below 112.23, a level of support that we described as a key area that must hold, otherwise, “the conditions for a top would be in play, and the bias would turn aggressively bearish.” While a rising bearish wedge (one possible interpretation of the consolidative price action between August and December 2018) normally calls for a return back to its base, the rate at which price was able to return within 3-pips of its 2018 low was certainly unexpected.

Similar to EUR/JPY, while the scope of USD/JPY’s reversal from its low on Thursday is impressive, a clear-eyed look at the technical picture suggests that more losses are still possible – especially if pressure remains on equity markets. At 108.50, USD/JPY was barely able to stave off a weekly close below 108.42, the 61.8% retracement of the entire 2018 March low-to-October 2018 high move. This is important for a reason that goes to the foundations of technical analysis itself.

In technical analysis, Fibonacci retracements are based around the concept of the Golden Ratio, 1.618, or phi; the 61.8% retracement is the inverse of phi and is deemed the ‘make or break’ level to determine if price action is ready to embark on a new trend. Accordingly, below 108.42 and we would suggest USD/JPY wouldn’t just be retracing its gains from 2018, but indeed was setting off on a new downtrend altogether. For now, traders should eye selling rallies into the daily 8-EMA, which USD/JPY has closed below every session since December 17, 2018.

GBP/JPY Price Chart: Daily Timeframe (August 2016 to January 2019) (Chart 3)

japanese yen weekly forecast gbp/jpy forecast

We’ve previously opined that GBP/JPY has been an ugly chart for a while, but it hasn’t been a reliable ugly given the overhang of the Brexit backdrop. But among JPY-crosses, GBP/JPY will therefore remain among the most volatile, possibly enticing traders to jump in.

Like in USD/JPY, a weekly close below the key 61.8% retracement at 136.94 (of its October 2016 low-to-January 2018 high range) was nearly avoided by ending Friday at 138.03. Even with the reversal on Thursday and gains on Friday, the technical picture continues to look difficult for GBP/JPY. Price is still trading below its daily 8-, 13-, and 21-EMA envelope. Likewise, both Slow Stochastics and daily MACD continue to trend lower in bearish territory, even if losses slowed at the end of the week.

It’s worth reiterating: it’s still worth staying away from GBP/JPY, as well as all GBP-crosses, unless you have an iron gut and strong tolerance for risk (and perhaps, a crystal ball for Brexit).

OTHER WEEKLY TECHNICAL FORECASTS

Australian Dollar Forecast: AUD/USD, AUD/CAD & EUR/AUD Prices Eye Technical Reversal Patterns

British Pound Forecast: 20-Month Spike Low May Be Re-Tested

US Dollar Forecast: Dollar Preparing to Break from its Most Restrictive Range In Four Years

Equity Forecast: Technical Forecast for Dow, S&P, DAX, FTSE 100 and Nikkei

New Zealand Dollar Forecast: NZDUSD to Continue Slide, NZDCAD Faces 2016 Resistance

Gold Forecast: Bulls Stopped Short Ahead of Key Level

Crude Oil Forecast: After Bull Flush Out, Bounce Likely In Play

Euro Forecast: Euro Choppiness to End Soon

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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