Price action this week - Sell-off ran out of steam closer to support at 110.15 (61.8% Fib R of Sep-Nov rally) in the first half of the week. The recovery ran into offers above 111.41 (38.2% Fib R of Jan. 8 high - Jan. 17 low) yesterday and prices fell back to 110.49 levels today.
JPY bid possibly due to fears of a US government shutdown
The retreat from 111.41 to 110.49 could be due to rise in haven demand for the Japanese Yen on fears of a US government shutdown. The US government is reportedly running out of time and according to the White House, the prospect of a shutdown has “ratcheted up”.
Currency pair ignores spike in US 10-year treasury yield
The 10-year treasury yield rose to 2.646 percent today; the highest level since 2014. Still, the USD failed to catch a bid. Analysts believe the rise in the yields is at least partially due to concerns about the US government shutdown. Also, yields have risen quite fast this month. A sustained move above 2.63 percent might rattle equity markets, as warned by Bond King Jeff Gundlach earlier this month. Is this one of the reasons why USD/JPY ignored rising yields today.
It's worth noting that the correlation broke down completely at the turn of the year as investors began pricing-in a quicker policy normalization in Japan and Europe. However, there is growing feeling that markets have run ahead of themselves and the BOJ is likely to reiterate its accomodative stance next week.
Will USD/JPY tank on US government shutdown?
The spot could drop below 110.00 levels on the government shutdown. That said, whether the pair slides towards the key support of 107.60 depends on how equity markets behave. According to LPL Financial, in the past 18 shutdowns, stocks fell 56 percent of the time, with an average decline of 0.6 percent. Clearly, the government shutdown does not necessarily mean the slide in equities.
USD/JPY could recover if the shutdown is averted
The unwinding of Yen longs initiated today could push the pair higher to 111.41. Further gains towards 112.00 cannot be ruled out as investors may price-in the sharp rise in the treasury yields and could scale back BOJ tightening expectations.
That said, the technical charts favor slide to 107.60 and see bullish reversal only above 113.84.
- Bears have regained control this month, courtesy of repeated failure to hold above 113.84 (23.6% Fib R of 2011 low - 2015 high) last year and rejection at the descending trendline hurdle in Q4, 2017.
- The spot looks set to test 107.60 (ascending trendline hurdle) and could extend losses to 106.58 levels (38.2% Fib R of 2011 low - 2015 high) in the next few weeks.
- Bearish invalidation - Close above 112.17 (61.8% Fib R of Jan. 8 high -Jan. 17 low).
- Bearish-to-bullish trend change - Multiple daily closes above 113.84 (23.6% Fib R of 2011 low - 2015 high).
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