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Japanese Yen Technical Analysis: Is the Rally Getting Overextended?

Japanese Yen Technical Analysis: Is the Rally Getting Overextended?

David Cottle, Analyst


Talking Points

  • The Japanese Yen has the US Dollar on the ropes
  • Its clear short-term downtrend is only the acceleration of a broader weak tone
  • The New Zealand Dollar is also struggling harder against the Japanese currency

See how the trading community feels about the Japanese Yen’s chances at the DailyFX Sentiment Page.

It will probably come as no surprise to you to learn that the Japanese Yen is putting in a pretty strong performance right now, especially against the US Dollar.

USD/JPY is right in the middle of a solid downtrend channel on its daily chart. This channel began at the most significant recent peak, July 10’s 114.00 or so (instructively that was some way lower than the previous notable top, made on May 11).

More worryingly for any remaining bulls, at the time of writing (02:00 GMT Friday) the Dollar seems to be failing at its next significant support level. It broke below June 14’s closing low of 109.33 a day ago and now only June 14’s intraday nadir of 108.75 remains of a cluster of props around that area. Should that give way – as looks very likely – then only a modest clutch of support at mid April’s lows of 108.44 stands between the pair and a retest of the long climb up from last November’s 103 levels.

One crumb of comfort for those still long, and it’s only a crumb, is that USD/JPY is starting to look a little oversold. Its Relative Strength Index is at 32. That’s only a whisker above the 30 point which is generally thought to mean objective overselling. However, we should not kid ourselves that the pair is in anything other than a broad downtrend which, if it is to be checked, is going to need more resolve than the bulls have so far shown.

This week has been a poor one for those long of the New Zealand Dollar. There’s a solid fundamental basis for this as at least two of its home central bank officials have actively tried to talk it down. That being so it should not be surprising that the technical picture has darkened a little and indeed it has. NZD/JPY had been in a gradual downtrend since it hit July’s 27’s peak of 83.87. The downtrend has picked up in the past five sessions with that downtrend line now much further away from the spot price.

Now support from June starting in the mid 78s is in view. NZD/JPY’s RSI is at this point more obviously in oversold territory than USD/JPY’s, standing at 22. That might make the Kiwi more prone to a bullish rethink than its US cousin but, all the same, significant near-term support around current levels is hard to spot.

One clear caveat to all this Yen bullishness must come not from the world of technical analysis but from the fundamental side. The investment world is clearly in a rather risk-averse mood and, given the heated rhetoric passing between the United States and North Korea this week, that’s fair enough.

However, risk appetite can change on a dime – and the Yen is perhaps the pre-eminent risk averse currency play. That’s something to bear in mind, surely, as you scan the upbeat charts.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter: @DavidCottleFX

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