USD/JPY Technical Analysis: Best 2-Week Run For JPY Since 1998

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Talking Points:

• USD/JPY Technical Strategy: New 14-Month Lows Favor Selling Rips
• USD/JPY Upside Aligned With Risk Sentiment, Which Bounced Higher on Friday
• JPY Remains Strongest G10 Currency As Risk Sentiment Sours

This week, USD/JPY broke down to the 110 handle with a low Thursday morning of 110.95. This level had not been seen since the Bank of Japan surprised markets on October 31, 2014 with a multiplied effort of Quantitative & Qualitative Easing that sent USDJPY toward 125 in rather short order. Now, with fear of lower growth around the world pushing central banks below zero trying to stimulate overall demand, the market and USD/JPY appears dependent on the development of a global recession or a resumption of risk-on.

It has been said that markets panic first, and panic later and that played out cleanly in the USD/JPY this week. The 2-week gain in JPY has been the highest since the 1998 Asian/Russian Crisis caused a massive carry trade unwind an a 5% drop in the US30. However, as markets test policy leaders, the lack of co-ordinated action with worry mounting could continue to see JPY strength without a word of intervention from the Bank of Japan. This development aligns nicely with our 2016 fundamental outlook.

Does A Short-Term Bounce Ahead?

Month to date, JPY has strengthened across the board. Against the US Dollar, the JPY has strengthened ~6.5%, and a short-term bounce could be ahead. The highlighted oval where price bounced after Thursday morning’s low on the chart aligns with a large price channel that has framed price and the 61.8% retracement right below Thursday’s low at 110.80.

The upside zone in focus early next week will be the prior zone of support that recently broke. In new trending markets, old support can turn into new chart resistance, and that would put attention on the daily range of the price extreme in December 2014 of 115.75-117.75.

However, such a move higher is estimated to provide better levels to sell unless the dour fundamental outlook changes dramatically in the next few weeks.

Additionally, the US Dollar continues to be sold, which will likely limit the ability for USD/JPY to push higher in a sustainable fashion. What is ironic is that the US Dollar weakness is coming as the US Dollar is subject to the Federal Reserve’s admittance to questioning the effectiveness of negative interest rates, something the Bank of Japan initiated on January 29.

T.Y.

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