USD/JPY: significantly bearish in risk-off markets subsequent of massive supply in TRY

  • USD/JPY kicked off the week within a bearish gap on the back of Friday's mayhem derived from the contagion concerns over the lack of liquidity in the off-shore debt market in the US dollar.
  • Risk-off markets sparked by the TRY's massive 15% sell-off, (84% YTD including today's further 8.5% drop) at the end of last week.

Currently, USD/JPY is trading at 110.64, up from the low of 10 pips lower - the pair had recovered to a high of 110.75. The yen has been playing out its usual safe-haven role while the greenback maintains its form on the 94 handle around the recent highs YTD of 96.45. The key focus was on risks associated to the Lira's massive losses last week and Trump turning the screw in tighter when double the tariffs on metal imports from Turkey leading to the USD strengthing across the board, treasury yields fell, stocks were sold, and commodities were mixed.

  • Black Swan Friday (that we should have seen coming) as it happened - Turkey risk and the tide of US dollar funding
  • USD/TRY - Dear Turkish financial minister: If at first you don't succeed, then don't TRY or TRY again

Meanwhile, the US data had little impact, despite coming it at a decade high while continuing the acceleration seen so far this year - CPI rose 0.2% in July, for an annual gain of 2.9% while the core version rose 0.24% in July and 2.4% annually (vs 2.3% expected). There is likely to be more of a focus on that data as traders get back to economics rather than geopolitics which will only go to serve the dollar's case for further upside, or at least underpin the greenback for the foreseeable future. 

As for the US 10yr treasury yields, these extended a multi-day decline, from 2.92% to 2.85%  and onto the lowest since 20 July. The 2yr yields fell from 2.65% to 2.59% as global risk-off play seeks out security in US government debt. 

Yen crosses on the defensive as well

On the crossflows, EUR/JPY broke the weekly cloud base at 126.19 and made a fresh of 125.80 in today's opening gap - on a continuation of risk off events and playout in the FX space 124.62 May low comes as next key target and will add a further wight to yen crosses - the euro is under the hammer on the back of the contagion risks associated to Lira debt in EZ keeping the banking sector under strain - (AUD/JPY also lower, now below the 80.63 June low to a fresh shot term low of 80.43).

USD/JPY levels

Valeria Bednarik, chief analyst at FXStreet explained that technically, the risk for the pair is leaned to the downside, although the bearish potential is limited, given that in the daily chart it keeps holding above its 100 and 200 SMA:

"The Momentum indicator stands pat around its mid-line, while the RSI gains downward traction at around 44. In the shorter term, and according to the 4 hours chart, the pair offers a neutral-to-bearish stance, as it is developing below its 100 and 200 SMA, with the shortest crossing below the larger one and both in the 111.30/40 region, while technical indicators recovered, heading up right below their midlines."

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