There is a potential technical battle brewing in the USD/JPY currency writes Fawad Razaqzada.
After a quiet Monday, the markets were already looking livelier this morning and volatility could rise further once U.S. market participants come back from their long weekend break. Overnight, risk sentiment turned slightly sour with Asian stocks falling, which led to a weaker open for European markets.
Apparently, this was in part because of news the International Monetary Fund cut its world 2019 GDP forecast and Canada announced that the United States will proceed with extradition request for Huawei Technologies CFO Meng Wanzhou, who is the daughter of the CEO. Huawei is accused of violating U.S. sanctions with Iran and the news has the potential to intensify tensions between China and the United States, although with the trade talks continuing it is just a side issue for the time being.
In FX, risk-sensitive commodity currencies dipped, and the yen strengthened, while the pound found mild support from positive UK data as investors continued to price out the prospects of a hard Brexit. The U.S. Dollar Index slipped as the yen (JPY/USD), pound (GBP/USD) and euro (EUR/USD) gained ground. This, together with a slight risk-off tone in equities, helped to underpin gold. The slight weakness of the dollar played no part in crude oil prices, however, which fell along with equities. Looking ahead, there isn’t a lot on the agenda in terms of economic news from North America. Perhaps, the only exception is U.S. Existing Home sales. But unless it beats or misses expectations by a big margin, it is unlikely to move the dollar much.
Given the slight weakness in both the dollar and equity markets, the risk-sensitive USD/JPY is among the interesting pairs to watch for further developments today. Yesterday, it turned lower from the lower end of the key 109.80-110.15 resistance range. This area had been the last significant support prior to the sharp breakdown at the start of this year. So, there is the potential for rates to break down from this resistance zone again. However, while the trend is admittedly bearish, price is at resistance and I am not very keen on the dollar anyway. So, it would make sense to expect the USD/JPY to turn lower from here. But the v-shaped recovery after that flash crash on Jan. 3, and the subsequent follow-up technical buying makes me wonder whether it has more room to the upside. Thus, I would like to see a clean breakdown first before turning bearish on this pair.
From a bearish point of view, a break below the 109.10 support is a prerequisite now. Bears would ideally like rates below 108.00, for that will create a new short-term lower low. However, if my concern is realized and rates push above the aforementioned 109.80-110.15 area first, then in that case, the recovery could go on for a while yet, with the 200-day moving average at 111.55 being among the potential targets for the bulls. At the time of writing, the USD/JPY was testing a potential support at 109.40, so by the time you read this, there was the possibility that the motion higher could have commenced from around that level.
Source: TradingView and FOREX.com.