Chart of the Day: USDJPY breaks 107 support. A move to 106?
After a subdued month, USDJPY has broken below 107 and is drifting lower this morning.
"Daily chart: USDJPY has been quietly selling off throughout April and closed yesterday below support at the 107 handle. Price action remains below the major EMAs. Chart source data: Metaquotes MT5"
USDJPY carved out April support at the 107 handle, resisting a move lower until yesterday. The fresh April lows overnight drove a close below support, and price action is taking the pair lower this morning towards 106.50.
Although momentum has been small during April, the pair has been quietly selling off. If today’s daily candle can post another lower high and lower low, it’ll strengthen the short-term downtrend as JPY bulls target 106. The 14-day RSI remains comfortably in the mid-range.
For any moves higher, the 5-day EMA (green) has capped the recent downtrend and should provide a resistance level. I also wouldn’t be surprised to see 107.00 support become resistance, and we might see USDJPY test this new resistance level if it holds lower.
Chart of the day: Time to fade the USD funding rally
Since the start of 2019, we’ve seen moves in USDJPY into 112 as the defining area to initiate short positions. We’re seeing that playing out yet again, with traders having pushed USDJPY into 111.50 having seen the cost for USD funding spiking and the USD finding buyers on a broad basis.
On the daily chart, after the strong run from 101.16 we’re seeing indecision playing through in the price action and stochastic momentum. While not giving us a clear indication just yet, it looks set to roll over. Getting set for downside in the pair seems compelling, for a move into 108.
Fundamentally, the incredible $580b (2.7% of GDP) increase in the Fed’s balance sheet in the last two weeks seems to be supporting equity markets. However, it may start to weigh on the USD more intently, especially if USD funding normalises thanks to its USD swap lines with global central banks. We don’t think QE4 (QE-unlimited) will be inflationary (USD positive), as long as the Fed pay’s banks 10bp to hold capital on their balance sheet, so much of the excess reserves created will be parked here and not put to work in the real economy (inflationary).
We also see signs that the US is about to become the epi-centre of the global virus pandemic, and while economics haven’t played into USD moves, it seems likely that they will as the market comes to terms the spread of the virus in the US. With an MMT administration and a central bank that will likely be buying a further $2t of assets by June – in line with the speculated fiscal stimulus program, we look for downside risk in USDJPY, although would close shorts on a closing break of the 112.50 zone.
Head of Research
Chart of the day: USDJPY recovering after the heavy decline
USDJPY weakened 2.88% on Monday, sending the JPY to 102.36 per dollar after hitting the session low of 101.18 - a level not seen since November 2016.
Crude oil tumbled the most since the Gulf War in 1991 as Saudi Arabia started an oil price war to lower its export price. The oil shock rattled the equity and FX markets across the globe. Petro currencies like CAD, NOK and MXN plummeted, while the JPY outperformed due to the safe-haven flow.
The US market
The US has been already criticised for its slow action to the spread of coronavirus, which has caused more than 600 infected cases and 24 deaths. Now the oil crash has given another heavy blow to the US, a net oil exporter with a relatively high cost of shale oil production.
Investors flocked into US Treasuries, pushing the 10-year yield below 0.5% and the 30-year yield under 1%. The corporate bond yield widened against treasury yield, making refinancing more difficult for companies who've enjoyed the low financing costs for such a long time. The interest rate market has priced in a 75bp rate cut on the 18 March FOMC meeting, weighing on the USD in the near term.
The Bank of Japan is stuck between a rock and hard place, as they will not be happy with the one-sided JPY moves, yet there is not much they can do about it. Any FX intervention and direct selling of JPY in the markets will be watched closely by the US and will risk strong condemnation. Now the oil price war is putting further pressure on the policy makers and risk sentiment more broadly and oil remains central to the market.
The movement of JPY, the risk proxy currency, is mainly driven by the equity market and oil price. Since the S&P 500 futures (+2%) and WTI crude futures (+4.3%) are recovering during the early Asian session on Tuesday. it's no surprise to see that JPY also bounced off the multi-year low and is trading at 103.23, with the RSI quickly moving north.
Considering the USDJPY 1-week implied volatility has increased to 32% and the highest since 2008, the market expects big moves. The pair might easily reach and test the key support-to-resistance level of 104.45, which is also a confluence with 5 EMA.
It is interesting to watch the price action around this level (104.45). The pair needs to fill the 104.16/99 gap to regain the upward momentum and further challenge 105.40, the 38.2% retracement level.
On the other hand, the price will be dragged lower should the sellers kick in here. The next level to beat for the bear is 101.18 followed by the 100.00 mark.