USD/JPY Forecast: Trend-line rejection & yield curve flattening is bad news
|The Dollar-Yen pair fell to a one-month low below 112.00 today as expected. The tax reform uncertainty, Mueller subpoena, and weak long-term inflation expectations saw the yield curve turn flattest in a decade.
The spread between the US 10-year treasury yield and the 2-year treasury yield referred to as a curve, fell to 62.33 basis points; its lowest level since Oct. 2007.
Treasury yield curve
- The flattening of the Treasury yield curve is bad news for the US dollar.
- The curve may continue to flatten next week unless the Fed minutes (due on Wednesday) sound more hawkish than expected. Also scheduled for release on Wednesday is the durable goods orders report.
- A big breakthrough on the tax reform front could lead to yield curve steepening and USD recovery, although technical studies indicate there is little scope for bulls to make a comeback.
Weekly chart
Source: Netdania
The above chart shows-
- Trend-line failure - The trendline sloping downwards from Aug. 2015 high and Dec. 2015 high remains intact. Having failed to cut through the trendline hurdle for three consecutive weeks, the USD/JPY pair finally succumbed to the bearish pressure this week and fell to a one-month low of 111.94.
- The RSI has turned lower as well and is expected to dip below 50.00 (bearish territory) in the coming week.
- The pair looks set to test the descending weekly 50-MA located at 110.30.
Daily chart
Source: Netdania
The above chart shows-
- A nice rounding top/double top breakdown and a drop to 38.2% Fib retracement level.
- A double top breakdown on the RSI.
- The spot looks set to take out the support at 111.70 (100-day MA + 200-day MA).
- The 5-day MA and 10-day MA carry a strong bearish bias.
- The only factor that favors the bulls is the ascending 50-day MA.
View
- The pair looks set to test 110.50-100.00 levels over the next week or two.
- Only two consecutive day-end closes above the upward sloping 50-day MA would abort the bearish view and may yield a rally to the recent high of 114.73-115.00 levels.
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