USD/JPY Forecast: Downside exposed as risk-off move could gather pace
|- Souring risk sentiment to weigh over the USD/JPY pair.
- Risk aversion may have just begun, indicates a breakdown in EUR/JPY, topping pattern in oil stocks and oil prices.
- Oil pullback to push down treasury yields.
The USD/JPY pair dropped to 108.95 on Thursday - the lowest level since May 8 as the US stocks dropped on renewed tensions between the US and North Korea.
There is a consensus in the market that President Trump's cancellation of a summit with North Korean leader Kim Jong Un risks pushing the US and North Korea back into crisis mode.
However, this is not the only cause of worry for the risky assets. Oil rally seems to have run out of steam, as discussed yesterday and could be in for a notable pullback as indicated by a sharp bearish reversal in energy stocks.
The bearish outside-day reversal indicates the rising trendline will most likely be breached. The decline in oil and energy stocks could weigh over the risky assets and keep the Yen well bid. Note, the pullback in oil could also push treasury yields lower (positive for Yen). As of writing, the 10-year yield is trading below 3 percent.
Further, the EUR/JPY, a global risk barometer, is set to drop further, courtesy of the head-and-shoulders breakdown, as seen in the daily chart below.
The bearish set up in the EUR/JPY indicates bad times ahead for riskier assets (and better times ahead for the anti-risk JPY).
Copper, widely considered a barometer of economic health, has breached the key ascending trendline and is likely creating a head-and-shoulders topping pattern. A downside break would only strengthen the bearish sentiment in the global equities.
Thus, the odds of a bigger drop in the USD/JPY pair are high. The technical charts favor a drop to 108.64 in the next few days.
USD/JPY Daily chart
- The pair has found acceptance below the key ascending trendline and the 200-day moving average.
- The 14-day relative strength index (RSI) dipped below 50.00 (in the bearish territory) yesterday.
- The 5-day MA has rolled over in favor of the bears. The chart also shows a 5, 10-day MA bearish crossover and 5, 200-day MA bearish crossover.
Thus, the pair looks set to test immediate support at 108.81 - 38.2% Fib R of 104.63-111.40 and could possibly drop further to 108.64. A daily close below 108.64 would confirm a bullish-to-bearish trend change.
On the higher side, only a daily close above the 200-day MA of 110.18 would abort the bearish view.
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