Japanese yen weak with stocks strong

Since the start of the new year and the USDJPY pair has been in an upward momentum, that is until the pair reached the 105.50 level. The instrument started the movement higher from 102.50, it struggled briefly to break above the 50-DMA (represented by the Green line) (Daily Moving Average), however the 103.50 kept things in check. Breaking above that level, USDJPY was able to continue to move higher, past the 100-DMA (represented by the Yellow line) and reached the 200-DMA (represented by the Blue line).

The grind higher in USD/JPY was curbed by the 200-DMA situated at 105.50, which in turn forced the instrument to fall towards the 100-DMA situated at 104.50. Once the instrument reached that level, the Bulls were quick to move back up as we see USDJPY stuck between the 100- and 200-DMAs.

Among the key players in the recent Yen weakness is none other than the U.S. fixed income, which has continued to soften with US 10s hitting 1.25%. Due note that recently, USD/JPY trading has been largely a rate play, given that JPY has failed to benefit from a softer USD.

Add to that the movement of the VIX (Volatility Index) below 20. This usually indicates that the flows into equities have continued, as can be seen with the Nikkei 225 reaching the milestone 30k for the first time in decades, hence adding additional pressure on the JPY, helping the USDJPY pair to rise. For now, as equities and U.S. yields continue to show a strong united front, we will continue to see the JPY on the weak side across all crosses.

Japan Finance Minister (FinMin) Taro Aso earlier ruled out chatter to recall the fiscal support measures amid the rally in Nikkei 225 to the highest since 1990. Following that the Bank of Japan (BOJ) Governor Haruhiko Kuroda refrained from calling the latest stock rally ‘excessive’. This just adds to the bullish narrative of the USDJPY with higher U.S. Treasury yields and higher stock market returns.

Behind the moves could be the welcome signs concerning the coronavirus (COVID-19) vaccine and the U.S. COVID relief package. Additionally, Japan’s readiness for mass immunization adds strength to the bullish mood. It’s worth mentioning that the improvement in the virus conditions in Japan offers extra strength to the trading sentiment.

Kyodo News reported, “A total of 965 daily coronavirus infections were reported in Japan on Monday, coming in below the 1,000 mark for the first time in three months, while the number of deaths related to COVID-19 topped 7,000.”

Looking at this from a technical perspective, we can notice that any upper movements in the pair will be faced with massive resistance at 105.50 which corresponds with the 200-DMA. In order for the bullish momentum to continue the instrument would need to establish a support above the 200-DMA, and what would even be better, is if the Bulls manage to make the 200-DMA as that support. Further up, the instrument would be looking at the 106.00 as the next level to beat.

However, on the flip side, if the USDJPY pair fails to actually break above the mentioned line, then it would find itself on the back foot again looking at the 100-DMA as an immediate support. After the first failure to break above the 105.50, the instrument fell towards the 104.50 at the 100-DMA, before the Bulls took control once again. To keep the bullish momentum intact, the instrument must not fall below the mentioned support.

A break below the support level, would put the target at the 104.00 level which corresponds with the 50-DMA. That would be that last line of defense for the Bulls before the Bears take over. Once the 50-DMA is broken, the downward pressure would mount, possibly setting a target at 102.50.

The RSI (Relative Strength Index) is showing that the momentum is clearly to the upside as the indicator prints above the 60-level and seems to be heading towards the 70-level and might enter overbought conditions. Solely based on that, the analysis is telling us that there isn’t much upside potential left and a serious move lower is needed to correct that. The instrument would need a move back to the 100-DMA so it can gather the needed momentum to attempt another push higher.