USD/JPY Forecast: bears took over, 110.00 possible bearish target

  • USD/JPY poised to extend decline, key support at 111.50.
  • Renewed trade tensions and collapsing equities backed the yen this week.

The Japanese yen settled at its highest in three weeks against the greenback, with the USD/JPY pair further retreating from the yearly high of 114.54. The greenback struggled to regain the positive tone seen the previous weeks following a soft employment report released last Friday later suffering from continued strength in US Treasury yields, which soared to multi-year highs. The rally in yields took a turn to the worse after US President Trump renewed its criticism on the Fed. Trump said that the central bank is "going loco," referring to the ongoing tightening in monetary policy, and all hell broke loose: equities and yields collapses, with the first also affected by renewed trade war tensions. US Treasury Secretary Mnuchin surprised the markets by stating that the US is watching the renminbi and that the currency should be included in any possible future trade deal.  Both events combined resulted in the DJIA losing over 800 points in a day, its worst daily performance since February, followed by another 500 points slump the next day. As for US Treasury yields, the benchmark yield for the 10-year note peaked at 3.26% earlier in the week, and later slump to 3.13%. The unhealthy volatility that spurred panic selling.

Things seem a bit more stable at the end of the week, although the greenback remains among the weakest currencies and the USD/JPY pair close to its weekly low, with dollar bulls hurt and side-lined.

There were no relevant macroeconomic releases in Japan, although the appreciation of the currency triggered jawboning from local policymakers. Japanese FM Taro Aso said on Thursday that the government is watching recent volatile market developments, although clarifying that their view of the global economy hasn't changed.  BOJ's Governor Kuroda,  repeated the same on Friday, saying that the recent surge in the US bond yields triggered a correction in the markets but there is no change to solid fundamentals in major worldwide economies.

Japan macroeconomic calendar will be more entertaining next week, with data scheduled all through the week. September Trade Balance and National Inflation are the most relevant releases. In the US, the most relevant release will be Retail Sales on Monday, seen up in September by a modest 0.5%.

The trade war and US Treasury yields will continue to have a strong influence on the pair.

USD/JPY technical outlook

The pair recovered some of its losses but is being capped by sellers around the 23.6% retracement of its latest daily decline a sign that bears retain control of the pair. The weekly chart shows that, after surpassing it the previous week, the pair is back trading below its 200 SMA but above the 100 SMA, while technical indicators retreat within positive levels, the Momentum pretty much neutral, and the RSI pulling back from overbought levels, skewing the risk toward the downside.

In the daily chart, the price is developing above its 100 and 200 DMA, both losing upward strength and with the shortest providing a dynamic support at around 111.50. Technical indicators in this last time frame have bounced back from their lows, but remain within negative readings, in line with additional declines ahead should the mentioned 111.50 level gives up. Below it next supports come at 110.80 and the psychological 100 level. The 38.2% retracement of the mentioned slump comes at 112.85, with gains above the level opening doors for a more steeper recovery up to the 113.40/60 price zone.

 

USD/JPY sentiment poll

The FXStreet Forecast Poll shows that the market is quite neutral in the USD/JPY pair, pretty common when the market is ruled by risk aversion, as both currencies are perceived as safe-havens. The pair is seen stuck around 112.00 in the weekly and monthly perspectives, while for the 3-month view, bulls take over, up to 57%. The average target in this last time frame under study, however, is around 112.49, with a wide spread of average targets. Nevertheless, the Overview chart shows that the larger accumulation comes around 115.00/116.00, with the moving average reverting the negative tone seen in the weekly and monthly views.

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