Even before Wednesday's US CPI report, we saw volatile moves in USD/JPY, which has been technically driven, allowing for the fact that there are no fundamental reasons for the significant price action.
It is well known that the Japanese yen is the go-to safe-haven currency due to the country’s enormous net foreign asset position. So it is no surprise that it is the only major currency this month that is in positive territory against the dollar after the stock market volatility we’ve witnessed recently. Indeed, we note that this recent out-performance has driven the yen to the top-performing G10 currency on the year as well.
Major Levels
This week's fall in the Nikkei 225 got some attention as the widely watched index is now closing in on 21,000. This is a significant technical level based on the 200-day moving average and also represents major support, previously marking the highs in 2015. So there is some speculation that the Japanese authorities could intervene if the market breaks below this level.
Whatever the speculation, JPY has continued to strengthen with previous structural levels being taken out. We’ve not seen a 106.00 handle in USD/JPY since November, 2016 and the pair is now down in five of the last six weeks of trading. This yen surge has inevitably prompted verbal intervention with some Japanese officials saying they are ‘closely watching’ movement in the currency.
USD/JPY Daily Candle Chart
We can see on the daily candle chart that momentum is firmly bearish. With last year’s low around 107.32 having been taken out overnight, we now need to see a close below here to see more downside. This break then becomes more important as USD/JPY has been trading in a wide range for several months. With lots of short yen positions also exposed to the sell-off, this could open the door for a sharp move lower toward the 2013 high, around 105.44. Of course, if this is a false break of previous lows, then prices really need to gain a foothold above the 110.50 zone to see any meaningful upside.
Much of course will depend on US data. It seems to us that a ‘positive surprise’ for markets, say +0.5% month-on-month in the headline, will be hard to come by. The focus on core CPI figures may also be a let-down as this very rarely surprises. That said, bearish momentum in USD/JPY is currently strong which could point to major moves in other risk markets over the next few sessions.