USD/JPY gapped lower at 104.45 today, having closed below the all-important 50-day moving average (MA) on Friday for the first time since April 11.
The key moving average support was the level to beat for the bears as it had reversed pullbacks seen in the previous three months. So, it seems safe to say that Friday’s close below the 50-day MA has turned the tide in favor the bulls, that is, the rally from the March low of 104.29 has ended.
The 5-day and 10-day moving averages (MAs) are trending south, indicating a short-term bearish setup. The relative strength index (RSI) is also biased toward the bears.
The bearish technical bias gels well with the negative macro environment.
Turkish Lira’s free fall triggered panic selling in euro and emerging market currencies on Friday. Deutsche Bank came under fire after Morgan Stanley analysts downgraded the German lender to underweight. The negative story does not end here.
Spanish, French and Italian banks are heavily exposed to Turkey, according to the European Central Bank (ECB) and more importantly, Turkey crisis could deepen in coming days as the country’s President Recep Tayyip Erdogan has reportedly ruled out an IMF bailout and opposes central bank rate hikes.
As a result, the financial markets could trade risk averse this week, keeping the anti-risk JPY better bid across the board.
The dollar funding cost continues to rise, with the three-month Libor now printing 2.3 percent. Many expect it to rise to 3.5 percent to 4 percent in the next 12 months, courtesy of the Fed rate hikes and balance sheet normalization.
The rising Libor, though USD positive, could actually weigh over the USD/JPY pair as the sharp rise in the dollar funding cost could prove costly for indebted nations. The resulting risk aversion could only boost demand for the haven currencies like JPY and CHF.
- USD/JPY’s close below the 50-day MA on Friday has confirmed a bull-to-bear trend change.
- The spot could find acceptance below 110.00 in the next 24 hours.
- A daily close above 10-day MA will likely reduce bearish pressure.
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