USD/JPY: Things could get ugly if we break major support at 116.00

After Friday’s not-as-bad-as-it-appeared NFP report, traders were optimistic that we would see risk sentiment return with Chinese markets on holiday this week, but so far those hopes have not been realized. It’s been an ugly start to the week for so-called “risk assets,” with global stocks, oil, and high-yield bonds all on the back foot at the start of the US session.

Beyond oil, one of the best indicators of global trader sentiment has been USD/JPY which is, not surprisingly, falling for the 6th consecutive day. On a technical basis, there’s strong support at the 116.00 level (from 116.25 as of writing) that buyers have defended repeatedly over the last 14 months. On each of the previous four occasions, the pair has surged by over 500 pips after testing this support zone, so there is certainly some ground for optimism among the bulls.

That said, the secondary indicators are hardly giving a strong bullish signal: the MACD has already rolled over and is once again trending lower below both its signal line and the “0” level, whereas the RSI indicator is not yet in oversold territory (where it was on the previous two rallies off 116.00 support).

From a fundamental perspective, there’s not much in the way of top-tier news releases in the early part of this week, and with the aforementioned Chinese holiday in play, we wouldn’t be surprised if USD/JPY consolidates above the 116.00 support level for a bit.

That said, if sentiment continues to sour or if we see negative US news from Fed Chair Janet Yellen’s Humphrey-Hawkins testimony (Wednesday and Thursday) or Retail Sales (Friday), that floor could quickly give way. In that case, the next major support level is all the way down around 114.00 which represents the 23.6% Fibonacci retracement of the entire 2011-2015 rally. Even if we do see a short-term bounce from this floor, medium- and longer-term traders will likely remain skeptical of the move below last week’s high at 121.00.