Yen gets hammered as USDJPY finds support

The generalised US dollar weakness intensified in early Asian trade yesterday as the rollercoaster ride that is the USD/JPY continued.

That heavy selling pressure on the greenback came after newswires reported that incoming US treasury secretary Steve Mnuchin said a dollar that was too strong would hurt the economy. 

That's not exactly fresh news. Anyone with even the most cursory understanding of the economics of trade in goods and services knows that a strong dollar will lead to some leakage in US growth into the broader global economy.  saw generalised US dollar weakness with the Yen the primary beneficiary. 

But Mnuchin's comment again brings into focus one big unanswered question forex traders - and global investors more broadly - are wondering right now. That is, what exactly will this new administration's policy be for the US dollar.

We already know that President Trump favours a weaker dollar so the strong dollar will stop "killing us" as he put it to the Wall Street Journal last week. And Mnuchin's comment seemed to reinforce that. 

For the second week in a row, the Yen ran into a wall of selling once USDJPY fell into the 112.50/70 zone yesterday. That makes four days where USDJPY has found support in this zone as the chart below shows. 

USDJPY is now a per cent higher at 113.77.

It's a clear signal that the buyers see some value in USDJPY around the 112.50 level. 

No doubt a big part of that is a continued expectation of strong policy divergence between the Fed and the Bank of Japan which will drive interest rate differentials sharply in the US dollars favour. 

That's something both Fed chair Janet Yellen and BoJ governor Kuroda highlighted last week. Kuroda then again reiterated that he will keep the policy in Japan accommodative even though he has a more upbeat outlook on the economy and inflation in the year ahead.  

So what's next for USDJPY?

The daily chart clear shows strong support at 112.50/60. That's above the 38.2% retracement level I've been watching at 112 but in the general vicinity and only a break of 112 would be bearish, rather than consolidative, for USDJPY. 

I say that because after such strong moves - the likes of which we have seen in USDJPY since the US presidential election - a 38.2% retracement is usual. As such it is not outright bearish - simply consolidative.