USD/JPY traded above 100.0 on Friday, but was under threat during early European hours. Nonetheless, price manage to stabilize just around the 100.0 mark, finding support from the rising trendline before the announcement of NFP figures. Price soared strongly when the better than expected numbers were released, strengthening USD and sending USD/JPY to new weekly highs. The pullback seen after the initial rally on USD/JPY was the weakest compared to other risk correlated assets such as equities futures and commodities. The reason for which can be seen in the subsequent hours of trading, where USD/JPY actually traded even higher when US equities indexes recovered from the sharp dip. It seems that on top of rallying on USD strength, USD/JPY is also benefiting from strong risk appetite flows, allowing USD/JPY to end the week on a high.
Monday early morning saw USD/JPY continuing the trend as positive risk appetite continuing to flow into the Asian stock markets, which saw Nikkei 225 gaping higher to almost 14,500 on open. However, things went downhill quickly by the time the rest of the Asian market opened, with Hang Seng Index gaping more than 250 points lower, and Shanghai Composite Index opening below 2,000. Nikkei didn’t fare any much better, trading lower and touching last Friday’s close (pre NFP levels) during Japanese Noon. The reason for the sell-off is not apparent, but could be due to significant technical pullbacks from the rally in US. Or perhaps the overall global equities market is still bearish, which would explain such strong selling into rallies. Whatever the reason may be, it is obvious that it is rubbing off USD/JPY negatively, with price giving up most of the gains garnered in the 2nd leg of the post NFP rally. This shows that USD/JPY is now starting to be highly sensitive to broad global risk trends, after being immune to it for a large period of 2013.
From a technical perspective, 101.0 may not be as strong a support as 100.7, which was the ceiling on 3rd July. Stochastic readings are currently showing a deep bearish cycle, which favors a price move back towards 100.70. It is likely that Stoch readings will hit Oversold when this happens, which also lends weight to the scenario of price rebounding from here. Even if price breaks 100.7, we have a rising trendline providing further support. Based on current trajectory, it is likely that trendline will be between 100.5 – 100.7, the consolidation ceiling on 3rd Jul. As such, we are looking at a very strong potential support zone below 100.7, and bears may need extremely strong risk aversion flows in order to break it.
Weekly Chart chart is not at a key junction. The past 3 weeks rally has formed a strong bullish reversal 3 White Soldier pattern, and suggest that price could break into the rising Channel, opening up 104.0 and Channel Top as potential bullish targets. However, as we approach the Channel Bottom resistance, it is possible that a bearish rejection may still occur, hence validating the decline from May, and reopens up 94.0 as bearish target. Stochastic readings is currently favoring the bulls, with current distance away from Overbought region giving ample space for moves beyond 104.0. However, as current “bull cycle” started not from the Oversold region, there is a possibility that the previous bearish cycle isn’t truly completed, especially given the length of time readings have stayed overbought. Hence, it would bee good for traders to seek further confirmation on the direction that USD/JPY is moving, be it up or down. This is especially important considering the sensitivity of USD/JPY to risk trends right now, with Stocks swaying wildly, we could see such volatility spillover to USD/JPY as well.