USDJPY Talking Points:

A lack of directional moves across FX of recent has left many major markets in a trend-less state. Elsewhere, however, a bit of tension remains as stocks remain on their backfoot as US Treasuries continue to be strongly bid. The 10-year is now trading inside of 1.5% after yesterday saw the 30-year trade inside of 2%. Yield curve inversion remains a factor of fear as well, and given the pensive headlines of recent, the potential for greater risk aversion remains.

In the FX space, this draws attention back to the anti-risk Japanese Yen. There’s a couple of notable items around the Yen and the Bank of Japan at the moment. Firstly, the BoJ has been on the aggressive side of Central Banking with ‘Abenomics’ still, in a form, going on seven years after the election of the Japanese PM. In that time, the BoJ has effectively cornered the JGB market while also starting to use QE proceeds to purchase stocks via ETF’s. To date, none of these efforts have helped Japan to effectively quell the years of slowing growth and deflation that plagued the economy following the Plaza Accord of 1985. Nonetheless, the simple lack of destruction in the past seven years has made their strategy appear more palatable to Central Banks elsewhere, such as Europe, where the ECB has noted the potential for a ‘significant’ QE package in the coming months, going along with a deeper rate cut into negative territory.

Where this comes into effect with current events is the fact that items of risk aversion will often show with Yen-strength as carry trades driven by a negative-rate regime further unwind during times of stress. This was very visible in Q4 of last year in USD/JPY, particularly the month of December as risk aversion hit a fever pitch across global markets. This spelled for a December high above 113.50 to an early-January low inside of the 105.00 handle.

USD/JPY Daily Price Chart

Chart prepared by James Stanley; USDJPY on Tradingview

The first quarter of this year brought a general theme of recovery as the FOMC became more dovish, removing the forecast from two rate hikes in 2019 down to zero at the March rate decision. That enthusiasm continued to show into April with prices beginning to turn in early-May, again driven by a similar move in US equities that saw risk aversion come back into favor.

And while stocks came screaming back in June and early-July, USD/JPY didn’t share in that bullishness; prices remained on the offer and have continued to trend-lower ever since. That swing-low from the early-year sell-off in USD/JPY was tested on Monday of this week. So far, it has helped to hold the lows. But sellers haven’t yet relented.

USD/JPY Daily Price Chart

Chart prepared by James Stanley; USDJPY on Tradingview

Taking a further step back and the importance of current support becomes a bit more visible. The two-year-low in USD/JPY previously sat around 104.56. Monday saw that level breached temporarily as sellers made an aggressive push.

Chart prepared by James Stanley; USDJPY on Tradingview

As mentioned earlier, since that intersection at two-year-lows, prices have bounced but as mentioned earlier, sellers haven’t yet relented. This has led to a nasty short-term backdrop that’s not displaying much for direction. But, given the build of a short-term descending triangle, that may soon change.

USD/JPY Hourly Price Chart

Chart prepared by James Stanley; USDJPY on Tradingview

USD/JPY Breakdown Potential

If risk aversion does continue to run and if USD/JPY does break down to fresh two-year-lows, there are a number of interesting spots to look for that next level of support. Short-term support will likely show at least some bid pressure around 105.00, but going back to the weekly chart and there’s a large area of confluence around the 103.00 level. Below that, the psychological level of 100.00 becomes of interest but along the way is additional support potential around 100.72. The five-year-low sits just below that at 99.03.

USD/JPY Weekly Price Chart

Chart prepared by James Stanley; USDJPY on Tradingview

To read more:

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--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX