USD/JPY Technicals – Short Term Downtrend Continues But 97.0 Holds Firm

It has been a one way street for USD/JPY this morning as Yen strengthened significantly following events over the weekend. Risk aversion grew slightly following House Speaker Boehner saying that he will never let pass a “clean” bill, thereby dashing the hopes of a quick resolution to the Governmental Shutdown.

Hourly Chart

However, it has been noted before that the market is not exactly bearish towards this whole “crisis”, and instead is adopting a stance between nonchalance and not knowing how to react. Hence, it is likely that there is additional forces driving USD/JPY lower.

In this regard, we can easily point to technicals as the smoking gun. Prices has failed to climb above the descending trendline on Friday which has been in play since 1st October. Therefore it is reasonable to believe that technical bears used the slight increase in risk aversion to push USD/JPY sharply lower on open. This bearish momentum was helped by the downgrade of China’s growth estimate by the World Bank today, sending price close to 97.0. However, the level continue to hold strong, sending price up higher right now. Stochastic readings are also pulling back higher, affirming the rebound off 97.0 support. But it should be noted that Stoch peaks and troughs for the past 3 trading days are marginally pushing higher, giving us a divergence signal with price action clearly showing lower highs and lower lows. Hence do not automatically assume that prices will rebound higher from here and tag the descending trendline. Preferably 97.2 soft intraday resistance need to be cleared to give us stronger short-term bullish convictions.

Daily Chart

From the Daily Chart we can see added importance of the 97.0 support. Stochastic readings on the daily chart is also Oversold, favoring an eventual bullish pullback. However Stoch curve remain pointing lower, and a bullish cycle signal is not yet in sight. Nonetheless, should a bullish signal emerge, it will be more “reliable” compared to the Hourly Stoch signal as there isn’t any issues with divergence. Furthermore, should prices trade higher from here and break the descending Channel Top, it is likely that a Stoch signal will appear, opening up 98.0 as the immediate bullish target, with 100.0 as the next bullish target if 98.0 is broken.

From a fundamental perspective, such a move is not impossible as BOJ is still expected to make an announcement on additional stimulus by the end of 2013. This is because Prime Minister Shinzo Abe has said last week that the Government will use 5 out of the estimated 8 Trillion Yen which will be raised from the latest sales tax hike. The market does not think this is enough, and expect BOJ’s Governor Kuroda to add onto it. If Kuroda does deliver, it is likely that USD/JPY will receive the bullish boost needed to move back towards triple digits. However, the failure to deliver is also severe, which may result in a break of 97.0 and push prices back down towards 94.0 bearish target.

More Links:
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EUR/USD – Receives Support at Key Level of 1.3550

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