USD/JPY: Tension spring about to unwind an almighty attack through the 111 handle

 

• USD/JPY is falling towards 112 again as dollar bulls capitulate as the DXY looks into a break below the 95 handle with 95 the figure being a big level as a prior support and resistance in late Sep and this month. 
• "Look for dips lower to find some support at the 111.81/83 late August high and 55 day moving average - Failure would target the 109.77/79 200 day ma and August low," - Commerzbank

The US CPI miss may have been a relief for markets but its a double-edged sword that is hurting the dollar and therefore enabling USD/JPY bears to capitalise on repatriation outlooks by Japanese investors that may see the US markets as a risk with less reward with respect to the carry advantage in long dollar, coupled with a speculative unwind of dollar longs on the cards. 

Joseph Trevisani, Senior Analyst at FXStreet explained that US Equities have some real concerns, being - ".

.. rising interest rates, trade contention with China, and the natural worry over an ageing bull market." However,  Joseph also notes that stocks have enormous profits - "The S&P  500 was up 59 per cent from its January 2016 low at Wednesday's open. Yesterday's plunge was as much about repositioning and profits as it was about tech fears on trade and the possibility of lower growth next year."

Repositioning in the dollar is what is happening

However, as short-sighted as the FX space can be, repositioning in the dollar is what is happening on a long speculative squeeze and until that is unwound, or a shift in sentiment occurs at a whim again, USD/JPY can target lower levels, especially as Chinese markets continue to contract with the CSI 300 now at the lowest levels since June 2016. 

However, while the ongoing decline in U.S. yields has delivered added support with a narrowing in interest rate differentials - should investors steer clear of the US for an extended period of time, a rise in rates could be even more problematic on the long end when taking into account the yield curve and raise concerns that a recisions could be imminent in the US. 

For the near term, however, risk reversals are starting to look somewhat extended which exposes the JPY to some fierce downside potential should sentiment flip and we should not forget that the divergence between the BoJ, the Fed and the current economic performance of the US economy. We recently had comments from BoJ board member Sakurai that have stressed the need to continue easing cautiously as a reminder of the state of play. 

USD/JPY levels

"USD/JPY has sold off aggressively," analysts at Commerzbank have noted. "We look for dips lower to find some support at the 111.81/83 late August high and 55 day moving average. Uptrend support lies at 111.59. Failure here would target the 109.77/79 200 day ma and August low."