USD/JPY – Lacking Clear Fundamental/Technical Directions

No clear trend has been seen in USD/JPY for the past few trading days. Prices was initially pushing higher on Thursday and Friday following the initial decline due to USD weakness post FOMC announcement on Wednesday. However, prices took a sharp turn yesterday, pushing below Friday’s soft support around 99.2 during early Asian hours and traded around 98.7 by the time US session started. This reason for this is because USD/JPY is under 2 opposing forces right now. Improvement in risk appetite vs USD strength. Stronger risk appetite traditionally drives USD/JPY higher, but unfortunately USD strength is becoming a huge issue due to all the QE tapering speculation. Wednesday’s (Thursday Asian hours) price action is a good evidence of the 2 opposing forces at work. Prices tanked after FOMC announcement as USD strength was sapped heavily after a surprising non-tapering announcement. However, bullish risk appetite took over the reigns, driving USD/JPY higher quickly once again.

Yesterday was a mixed bag, where risk appetite should have been higher following stronger than expected Chinese Manufacturing PMI, but USD/JPY did not react bullishly despite Shanghai Composite Index and Nikkei 225 trading higher then. The subsequent bear trend is easier to explain, as risk appetite was declining, with European and US stocks all pushing lower. However, the decline in stock prices has been attributed to speculative play for a QE Tapering event in October, which should have brought USD/JPY higher on stronger USD. The fact that USD/JPY bulls did not put up much of a fight yesterday is odd especially given that EUR/USD, GBP/USD and AUD/USD all traded lower. The only plausible explanation for yesterday’s development would be that USD/JPY are more sensitive to risk appetite trends instead of USD strength, but that explanation will not fly when we consider the huge rally seen from a low of 97.76 to 99.64 – almost 200 pips when current ATR is currently less than 50 pips and never breaking 150 pips since 12th July.

Hourly Chart

Technical directions isn’t clear either. Despite pushing lower, prices is holding around 98.6 comfortably. Even though Ichimoku is bearish with forward Kumo pointing lower coupled with a bearish Kumo break, there isn’t a sense of bearish urgency after the bearish breakout has been confirmed following the failure to retest Senkou Span B earlier. Perhaps USD/JPY traders are also feeling confused given the lack of clarity in fundamentals, resulting in traders not wanting to commit heavily even though technicals are showing signs of bearish pressure. Stochastic indicator isn’t helping matters either, with Stoch curve actually pointing higher currently, threatening to cut the Signal line. Furthermore, readings suggest that current bullish cycle that started from yesterday’s lows may be still in play, hence a stronger bullish recovery may still be possible as long as 98.6 holds.

Daily Chart

Daily Chart is also yet another mixed bag. USD/JPY has been printing lower and lower highs yet higher and higher lows. The strong rally of Wed/Thur shows coincided with a technical rebound off both structural trendlines, yet the bullish follow-through isn’t there. As such, initiative should be given to bears which opens up the trendlines intersection as a possible bearish target. That being said, Stochastic readings remain pointing higher, turning around where the previous trough and point of inflexion was seen, therefore it will be premature to rule anything out. Those who are more conservative may wish to wait for price to break the recent swing high in September or perhaps the 98.0 intersection (but preferably below 97.0) for stronger direction. Hopefully then market would have figured out which fundamental driver they would like to follow and we could then see stronger follow-through towards the end of the year.

More Links:
EUR/USD – Eases back below Support at 1.35
AUD/USD – Attempting to Stay Above Key Level at 0.94
GBP/USD – Moves up from Support at Key 1.60 Level

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