USDJPY: Sailing through Rough Retail Sales Seas

A few weeks ago, we raised the possibility that USDJPY could see a breakout from its 7-month descending triangle pattern (see “Time for USDJPY Traders to Wake Up?” for more). A few days later, the pair broke out of the pattern, eventually running up to 103.00 before losing steam and pulling back to 101.50 last week. Now, as we go to press, the fundamental picture for USDJPY is mixed, but the technical outlook remains generally bullish.

Overnight, traders were hit with a shocking headline Japanese GDP figure that showed the island nation’s economy contracted by 1.7% q/q, or 6.8% annualized. Of course, the proverbial elephant in the room was the big sales tax hike introduced by the Japanese government on April 1, which undoubtedly pulled forward many purchases from Q2 into Q1. Nonetheless, if growth fails to pick up in Q3, the Bank of Japan may be forced to increase its QQE program, likely hurting the yen (for more on the GDP report and outlook for the yen, see my colleague Chris Tedder’s note from today’s Asian session).

However, just when USDJPY bulls were nearing cruising speed, the US Retail Sales report took the wind out of their sails. US Retail Sales for the month of July came in at 0.0% m/m, below the 0.2% growth that traders and economists were expecting. More concerning, Core Retail Sales (which filters out big ticket automobile purchases and is more closely watched by policymakers) came in at just 0.1% m/m against expectations of a 0.4% rise. With poor data coming out from both sides of the Pacific, the short-term fundamental bias for USDJPY is muddy.

Technical View: USDJPY

Though last week’s pullback was no doubt disappointing for USDJPY bulls, the overall technical picture remains constructive. The pair found support on the topside of its previously-broken descending triangle pattern, carving out a large Bullish Pin Candle*, or hammer, in the process. This formation shows an intraday shift from selling to buying pressure and is often seen at near-term bottoms in a chart. Meanwhile, the RSI tracked price by finding support on the topside of its corresponding triangle pattern, and the MACD is holding above the key “0” level, indicating bullish momentum in the pair.

Looking ahead, USDJPY is lacking any strong fundamental catalysts for the rest of the week so traders may defer to the bullish technical view. From here, a slow grind up toward previous resistance at 103.00 is favored, and if rates can break through that ceiling, a continuation toward the 7-month high around 104.00 could come into play next. On the other hand, a break below strong previous support at 101.00 would shift the technical bias to the downside for a possible test of the 100.00 level.

*A Bullish Pin (Pinnochio) candle, also known as a hammer or paper umbrella, is formed when prices fall within the candle before buyers step in and push prices back up to close near the open. It suggests the potential for a bullish continuation if the high of the candle is broken.