USDJPY and EURUSD Technical Analysis

USD/JPY can often act as a helpful proxy as to how the market as a whole is viewing risk. Typically in market sentiment, if USD/JPY is higher, there is a relative sense of calm in markets as JPY is often sold in risk-seeking times. The move higher in USD/JPY after the November 8 election went in line with the aggressive move higher in equities alongside the aggressive sell-off in bonds that helped investors and analysts get a refresher on duration & convexity in fixed income markets.

The recent fall in USD/JPY of ~5% has begun to cause traders to question the post-election rally. Unfortunately, there are strong narratives in markets, but no certainties. One of the key narratives is that the new Trump Presidential administration that comes into office this Friday has been riding a fiscal wave to project likely inflation and dollar repatriation that has been perceived to be a net-positive for USD and inflation expectations that have driven USD/JPY higher.

However, as the narrative begins to come into question, though many of us at DailyFX believes the Strong-Dollar/ Inflation story resumes later this year, USD/JPY has broken down. From a technical perspective, there is a clear zone of support to watch below the current price of ~113 that is comprised of the Daily Ichimoku Cloud as well as the Fibonacci Zone that we’ve long been watching.

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Daily

4 of the last 6 days have seen time below December low (112.87), including 2 closes. Even so, USD/JPY needs to establish above the 114.80s (12/1 high and December FOMC low) in order to suggest that the month long (and YTD) downtrend is no longer.


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USDJPY - The ratio of long to short positions in the USDJPY stands at 1.47 as 60% of traders are long. Yesterday the ratio was -1.14; 47% of open positions were long. Long positions are 33.5% higher than yesterday and 2.8% below levels seen last week. Short positions are 20.5% lower than yesterday and 0.6% above levels seen last week. Open interest is 4.7% higher than yesterday and 6.7% above its monthly average.
We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are long gives signal that the USDJPY may continue lower. The trading crowd has flipped from net-short to net-long from yesterday but unchanged since last week. The combination of current sentiment and recent changes gives a further mixed trading bias.

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EUR/USD
Weekly

Last was the smallest non-holiday weekly range since September 2012. This week was an outside week (although didn’t close on the highs). The current dynamic is the exact opposite of what happened in September 2012 (tiny weekly range and an outside week…circled on the chart). Price wise, EUR/USD is fighting against 1.0820/50, which was support in 2015 and 2016. It’s a big level but consider upside as long as above this week’s low due to the mentioned small range, outside week dynamic. If this week’s low is taken out then I’d still watch for support near 1.0462-1.0539 (2015 lows). Remember the weekly RSI comment – “the fact that the indicator has turned up from above 30 is a positive but pay attention to the 60 value for resistance.”

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The Euro looks vulnerable to deeper losses after dropping to the lowest level in a month against the US Dollar, with prices seemingly poised to test below the 1.06 figure. The single currency reversed downward as expected after a test above the 1.08 threshold, completing a bearish Rising Wedge chart pattern.

A daily close below the 14.6% Fibonacci expansion at 1.0643 has exposed the 23.6% level at 1.0528 as the next downside barrier. A further push below that targets the 38.2% Fib at 1.0341. Alternatively, a reversal back above 1.0643 sees the next major upside threshold at 1.0828, the 38.2% Fib retracement.


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A sharp Euro recovery stalled at a familiar chart barrier below the 1.07 figure, hinting that a corrective bounce from a monthly low may have been exhausted. Near-term positioning has favored the downside since prices broke through the floor of a bearish Rising Wedge chart pattern two weeks ago.



Near-term support is in the 1.0518-28 area (November 24 low, 23.6% Fibonacci expansion), with a daily close below that exposing the 1.0341-67 zone (December 15 low, 38.2% level). Alternatively, a push above support-turned-resistance at 1.0682 opens the door for a retest of the 38.2% Fib retracement at 1.0828.

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We noted in the recent article title, USD/JPY Technical Analysis: An Intermarket and Technical Powderkeg, that there is a lot going on behind the scenes that could cause USD/JPY to move and move big. Another positively correlated market is UST Yields, which have been unable to breakout higher (bond prices pushed lower) but have received news that the Fed appears ready to hike multiple times in 2017 as they are sitting near the targets of both mandates of price stability (inflation at 2%) and full employment.

Many traders may look at these events and think that we’re about to see a breakout in the VIX and that the S&P at all-time highs means that a crash is imminent. While the future is unknown by definition, one should be a caution to attribute a fixed outcome to the future as the VIX seems to show less fear than in times past. If this is correct, we could continue to see the SPX500 push higher alongside USD/JPY finding upside traction.

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JPY strength continues into the close of February and in anticipation of President Trump’s speech that will be analyzed for details on the timing of stimulus that could revive the reflation trade. There is a strong positive correlation to yields of US Treasuries and USD/JPY and a clear message from President Trump that inflationary inducing policies are on their way would likely help boost USD/JPY. Lack of details could keep the market on its current course of giving back-post election gains, most notably in JPY crosses. An additional fundamental note worth considering is that March is the last month of the Japanese Fiscal Year, which may lead to further JPY demand in the coming weeks from Japanese accounts that could push USD/JPY lower.

As of Tuesday, the Japanese Yen is the strongest currency in G8 FX on a relative basis, when analyzed on an H4-chart against a 200-DMA. From a momentum perspective, it’s difficult to tell when the momentum will stall. Traders who track momentum can look to RSI(5) on the Daily Chart to see if a higher low in RSI(5) aligns with the chart support of the Ichimoku Cloud and Andrew’s Pitchfork drawn from the closing low of last Summer. The 100-DMA also aligns with the Ichimoku Cloud base at 111.74.


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Euro sellers have struggled to maintain downward momentum since the single currency found support below the 1.06 figure against the US Dollar two weeks ago. Still, overall positioning continues to favor continuation of the long term down trend.

From here, a daily close below support in the 1.0518-28 area (November 24 low, 23.6% Fibonacci expansion) exposes the 1.0341-67 zone (December 15 low, 38.2% level). Alternatively, a turn above support-turned-resistance at 1.0682 paves the way for a retest of the 38.2% Fib retracement at 1.0828.

On one hand, prices are too close to support to justify entering short from a risk/reward perspective. On the other, the absence of a clear-cut bullish reversal signal argues against even a tactical long trade. With that in mind, standing aside seems most attractive until something more compelling presents itself.

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USD/JPY
Weekly

USD/JPY has turned up within its channel but preference remains for sideways trade. There are a few reasons for wanting to fade strength and buy weakness (range trade), chief among them is the fact that the 13 week average is flat and price levels are well defined. Generally speaking, 115.50-116.00 has been important on both sides of the market since December 2014. As long as price is below the level, the zone is resistance.

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