USD/JPY Forecast: Rise in Jap trade deficit & a potential inverse Head & Shoulder

USD/JPY jumped to a high of 114.96 earlier last week, but the subsequent failure on the part of the 10-year treasury yield to hold above 2.5% took the wind out of the dollar bulls. The pair ended last week on a weak note at 112.92 levels. At the time of writing, the spot was trading around 112.88 levels. US markets are closed on account of President’s day.

The Japanese trade deficit widened on energy imports

Japan’s trade balance turned negative in January, as imports surged. Exports increased at an annualised 1.3% in January and imports rose 8.5%. Markets were expecting imports to print at 4.7%. The sharp rise was largely due to energy imports. Oil averaged $30/barrel a year ago. This year, prices have been stuck around $52… i.e. 73% higher than Jan/Feb 2016.

Thus, the surge in import and trade deficit should not come as a surprise, although it is bad news for the Japanese Yen. Moreover, Japan is energy dependent and hence oil positive event/news flow is bound to be Yen negative. Meanwhile, Lunar New Year holidays could have weighed over the export growth.

Key takeaways - Exports to US fell 6.6% this January (Heartening for Trump). Exports to the EU fell 5.6%, while those in China jumped 3.1%. Japanese total trade deficit rose to JPY 1,086.9 billion in January

A surge in the Japanese trade deficit had increased the odds of the USD/JPY bulls defending support around 112.50-112.40. A rebound from the said levels could led to inverse head and shoulder formation seen on the four hour chart below

4-hour chart

  • Inverse head and shoulder neckline is seen around 115.00 levels.

Daily chart

  • A rebound from/near 112.50 levels followed by a daily close above 113.48 (5-DMA) would open up upside towards the neckline resistance seen around 115.00 levels.
  • Only a daily close below 112.50 (sliding trend line support) would add credence to the bearish RSI and signal bullish invalidation. The 100-DMA level of 111.00 could be put to test in this case.

AUD/USD Forecast: Pull back to 0.75 likely this week

Weekly chart - Doji at critical resistance

  • Last week’s Doji candle and another failure to close above 0.77 handle points to indecision. Also note the Doji is preceded by a Dragon Fly Doji.

Daily chart - Bearish price RSI divergence

  • On the daily chart, we have a bearish price RSI divergence.
  • A break below 0.7610 would add credence to the exhaustion seen on the weekly chart and divergence on the daily chart. The spot could test 0.75 levels then. Such a move could also yield a bearish crossover the daily DMI.
  • However, bears should not get too ambitious given the fact that the ADX line is losing height and is pointing lower, which suggests weak momentum.

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