Gonçalo Moreira, CMT
Independent Analyst
USD/JPY has been respecting the topping development it has been in since last week when it decisively rejected the previous week high at 105.30 carving a double top. With its neckline broken yesterday, the yen weakened to 103.55 per dollar after touching 102.85 yesterday, just 40 pips above the minimum ultimate objective from the mentioned reversal pattern at 102.40.
The move passed clean through the uptrend line on Friday at NFP release, and could cause some turbulence in the days ahead. Yesterday's 130 pips range is not a statistical outlier, but it could give bears a technical reason to ignite a sell off. Its worth mentioning that accordingly to recent CoT data, large speculators seem to reverse their sell positions in the Japanese yen liquidating short contracts.
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Not only US stocks fell the most in 2 months, the Nikkei also deteriorated over 3% weighed down by the stronger JPY. The inverse correlation between the Japanese yen and the Nikkei futures is hampering the USDJPY (which is positively correlated as seen in the below chart). Both markets moved significantly lower, breaking below their respective uptrend lines, and skewing the probabilities for an extended downside reaction.
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What does this mean for traders? Watch for sell offs in the stock market if you are trading USDJPY. Despite a recovery to 103.70 today, the pair is precariously perched at the 4H 200SMA. As long as the broad-based USD weakness persists, and until more positive US economic data gets the pair back on track, selling on any recovery below the weekly pivot point at 104,50 is favoured.
In order to correctly assess the above performance chart, consider that for Japanese investors, buying dollar denominated assets with a weak yen translates in a higher turnover when changing those dollar gains into yens. Conversely, investing in the Nikkei with US dollars means that any increase in the USD/JPY reduces the relative returns.
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