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USD/JPY Technical Analysis: Alignment With US Yields Favors Downside

USD/JPY Technical Analysis: Alignment With US Yields Favors Downside

Tyler Yell, CMT, Currency Strategist

Talking Points:

The strong correlation of USD/JPY and the US Note Yields is becoming a key story again. US 10yr yields are lower for the fourth straight day as of Wednesday afternoon for the first time since June. The spot price on Wednesdays afternoon is below 112, which turns focus on the November 28 and 23 low of 111.36 and 110.86 respectively. Some technicians are warning of a potential head and shoulders bearish reversal pattern on US 10Y Yields, which with the correlation coefficient of USD/JPY over the last 20-days at +0.70 should hold USD/JPY traders attention.

In addition to the USD/JPY alignment with UST 10Y Yields as seen in the chart below, hedge funds look to be cutting their JPY shorts, which could help guide USD/JPY lower. Per the CFTC data released last Friday on the CoT, Hedge Funds or Leveraged Funds reduced net JPY shorts by 13,995 contracts to 33,376. A continuation of the trend should add further downside pressure.

Overlay of USD/JPY (Red Line) on UST 10Y Yields With Potential Bearish Head & Shoulders

USD/JPY Technical Analysis: Alignment With US Yields Favors Downside

We’ve long been on the watch for 109.92, which is the 50% retracement of the Post-Trump rally. As we sit without a change in the broad direction of the USD at the 38.2% retracement of the USD/JPY at 111.90, the 50% retracement appears to be an appropriate target as the DXY has had a difficult time gaining traction despite the earlier push this week off 112.

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The 50% retracement of the November 8 to the early-January range at 109.90 aligns with the bottom of the Daily Ichimoku cloud (not pictured). There remains a key missing component for the majority of traders who are trying to buy low in USD/JPY, and that is the momentum line on H4 Ichimoku. The lagging line is the close of the current candle pushed back 26-periods. A break above the cloud of the lagging line shows that momentum has flipped from its current bearish path.

We have also drawn the Andrew’s Pitchfork, which has been helpful, but not as helpful in my opinion as Ichimoku on an H4 chart waiting for the lagging line to break above the cloud before going long or following the trend lower.

H4 USD/JPY Chart: USD/JPY Resumes Lower In Counter-Trend Channel & H4 Ichimoku Cloud

USD/JPY Technical Analysis: Alignment With US Yields Favors Downside

Chart Created by Tyler Yell, CMT


Shorter-Term USD/JPY Technical Levels: February 8, 2017

For those interested in shorter-term levels of focus than the ones above, these levels signal important potential pivot levels over the next 48-hours.

USD/JPY Technical Analysis: Alignment With US Yields Favors Downside

Contact and discuss markets with Tyler on Twitter: @ForexYell

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