FX Technicals: Where Are We Now?

Currency pairs have been on the move over the past few weeks, most notably with the yen regaining some ground and the dollar's gains stalling. However, the moves in currencies have actually led those of stocks, so traders would be wise to take note of where currencies are heading from here.

Yen Weakness Leading S&P 500
Since April, when the Bank of Japan launched its latest round of easing aimed at defeating deflation, the USD/JPY has weakened and fueled gains in U.S. equities. Money pouring into the dollar was invested into the stock market to boost returns in a very risky carry trade.

However, recent weakness in the USD/JPY predicts weakness in U.S. stocks ahead. Should the yen not correct and the USD/JPY rise, the pair is predicting that the S&P 500 should be closer to 1575, representing about 4.3 percent downside from Monday's close.

Yen Forecasts
The USD/JPY has fallen sharply in early Tuesday trade following a failure of the Bank of Japan to add further stimulus. The USD/JPY dropped nearly 2 percent to 96.93 after closing Monday near 99.

CommerzBank said Tuesday that:

USD/JPY as suspected has rallied higher to re-test the 55 day ma at 99.02 yen. This is regarded as a return to point of break out from the 7 month uptrend, we would expect near term rallies to fail ahead of the short term downtrend at 100.55 yen, to leave risks back on the downside. We note the Elliott wave count suggests failure circa 99.50 yen.

The risk has grown that we will see a deeper sell off to the 93.58 yen 38.2 percent retracement and then 90.43 yen the 50 percent retracement. Above the resistance line and 20 day moving average at 100.73 yen will neutralize the outlook and imply another test of the 103.74 yen May high.

The technical analysts at Credit Suisse led by David Sneddon agree, saying that the pair needs to rebound above 100.50 to break the downtrend. "Above 99.47 can see strength extend to 100.40/50 – trend line and price resistance – but with a move above here needed to turn the trend higher again for 102.53." They recommend a short at with a stop above 99.47 targeting 93.60.

Should the yen extend gains down to 93.60 and the correlation with stocks holds, the move would imply a sell-off in equities of about 6.7 percent from Monday's close, further than the implied downside from current levels. For traders, it could mean that now is the time to hedge for more downside, rather than buying on this recent pullback in stocks from May's high of 1,687.18 (down 2.7 percent from high as of Monday's close).

Aussie Weakness
Alongside yen strength of late, weakness in the Australian dollar has been a large theme. After breaking through parity back in May for the first time in since June of 2012 against the U.S. dollar, the AUD/USD has slid all the way down to new lows near 0.9325. Credit Suisse says:

A daily DeMark buy is in place. However, we look to fade any strength for an eventual break lower to .9145.

Bigger picture though we stay bearish, and we look for an eventual clear break below .9388 in due course for .9145 – the 38.2% retracement of the 2008-11 rally.

They recommend a long at 0.9435 with a stop/reverse at 0.9380 targeting 0.9625. However, should stops be taken out, they recommend going short to the 0.9145 target.

The Australian dollar has been getting particularly whacked Tuesday. The Aussie lost 1.1 percent against the greenback in early trade and shed 3 percent against the yen. The euro also gained over 1 percent again the Aussie.


BY Matthew Kanterman