USD/JPY a harbinger of doom?

As markets await the US CPI report, like they never have before (or at least in recent history), we’ve already seen some volatile moves in USD/JPY this week which have been technically driven, allowing for the fact that there are no specific fundamental reasons for the significant price action.

It is well known that the Japanese yen is the ‘go-to’ safe-haven currency due to the country’s enormous net foreign asset position. So it is no surprise that it is the only major currency this month which is in positive territory against the dollar after the stock market volatility we’ve witnessed recently. Indeed, we note that this recent outperformance has driven the yen to the top performing G10 currency on the year as well.

The fall in the Nikkei 225 again this week has got some attention already as the widely watched index is now closing in on 21,000. This is a major technical level due to the 200 day moving average coming in here and it also represents major support, previously marking the highs in 2015. So there is some speculation that the Japanese authorities could intervene if the market breaks below this level.

Whatever the speculation, JPY has continued to strengthen overnight with previous structural levels being taken out. We’ve not seen a 106.00 handle in USD/JPY since November 2016 and the pair is now down in five of the last six weeks of trading.  This yen surge has inevitably prompted verbal intervention with some Japanese officials saying they were ‘closely watching’ movement in the currency.

We can see on the daily candle chart that momentum is firmly bearish. With last year’s low around 107.32 having been taken out overnight, we now need to see a close below here to see more downside. This break then becomes more important as USD/JPY has been trading in a wide range for several months. With lots of short yen positons also exposed to the sell-off, this could open the door for a sharp move lower towards the 2013 high around 105.44. Of course, if this is a false break of previous lows, then prices really need to gain a foothold above the 110.50 zone to see any meaningful upside.

Much of course will depend on the US data this afternoon. It seems to us that a ‘positive surprise’ for markets, say +0.5% month-on-month in the headline, will be hard to come by.  The focus on core CPI figures may also be a let-down as this very rarely surprises. That said, bearish momentum in USD/JPY is currently strong which could point to major moves in other risk markets over the next few sessions.