USD/JPY Forecast: Vols rise, risk-off could yield 109.43

Omkar Godbole FXStreet Contributor

The Dollar-Yen pair dropped to a low of 110.07 yesterday and extended the losses to a low of 109.74 as the risk-off action gathered pace on the latest bout of North Korea tensions. The American data docket is light; hence the spot remains at the mercy of the broader market action. Worsening of the risk aversion in the European and US session could yield a sell-off to or possibly a break below the trend line support seen at 109.43 levels.

Technicals

Resistance

110.32 [5-DMA] - 110.49 [10-DMA]
110.59 [weekly 50-MA]
110.98 [61.8% Fib R of 108.80-114.49]

Support

109.43 [support offered by the trend line sloping upwards from the April 17 low and June 14 low]
109.00 [psychological level]
108.80 [June 14 low]

Daily chart

Observations

Falling channel established
Bearish 14-day RSI

View

Repeated rejection near 111.00 levels this month, followed by a break below the support at 109.84 [Aug 4 low], indicates the sell-off from the high of 114.49 has resumed.
The spot could test support at 109.43 levels.
An end of the day close below 109.43 would add credence to the rejection at the monthly 50-MA and open doors for a bigger sell-off to 108.00 levels.
On the higher side, only a break above 111.00 would signal bearish invalidation.

The uptick in Vols indicates the scope for further sell-off

The one-month ATM option volatility [green line] has ticked higher to 8.38 from the previous day’s print of 7.925. That indicates the possibility of a sell-off towards 109.43 levels today.

Tuesday’s sell-off in the spot was also accompanied by an increased demand for the Put options. This is evident from the deterioration in the one-month risk reversal [magenta line] from -0.975 to -1.025.

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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