USD/JPY: Things could get hairy if 111.00 support gives way

Markets are off to a ponderous start to the week as theres been essentially no new data to digest over the weekend. Global equities, fixed income, and currencies are all essentially unchanged across the board and with no major economic releases on tap for today’s US session (beyond the second-tier Existing Home Sales report at 14:00 GMT), the slow trade could continue throughout the day.

While we may not be in the most exciting environment for intraday scalpers, a number of markets are at key intermediate- and longer-term levels, prominently including USD/JPY. As we noted last week, the Fed’s dovish shift has effectively devalued the dollar; in terms of the USD/JPY, this means that the pressure has shifted back to the Bank of Japan, which definitively does not want to see a stronger yen. At this point, many traders and analysts believe that the BOJ may have to resort to outright currency market intervention if USD/JPY falls further, with many speculating that the BOJ’s “line in the sand” for intervention is around the 110.00 level.

Technical View: USD/JPY

There are not many market-moving economic releases out of either the US or Japan for this entire week, so USD/JPY’s near-term fate will be determined by a combination of risk appetite and technical factors. The yen remains one of the world’s preeminent safe haven currencies, so a drop in equities this week could certainly drive USD/JPY into the danger zone around 110.

From a technical perspective, there’s clear near-term support ahead of that level at 111.00, where buyers have stepped in to defend the pair on three occasions in the past six weeks. A confirmed break below this floor may lead to a quick drop to the 110.00 level, but there is a technical case for a bounce from 111.00 this week. Beyond the previous support in that range, both the MACD and RSI are showing bullish divergences at the recent lows, signaling waning selling pressure on each subsequent dip.

As long as risk sentiment (read: major stock market indices) hold up this week, USD/JPY could see a bounce back toward the middle or upper end of its recent 111.00 – 114.00 range this week. That said, short-term USD/JPY bulls should keep their helmets handy, as the pair could get extremely volatile if we convincingly break below 111.00 support.