USD/JPY has given technical indications of a broader turn from mid-August lows. The pair has been consolidating Since October 6 but a trendline break on the 4-hour chart suggests that the uptrend is about to resume.
The currency pair made a bullish break from a declining channel earlier this month. The channel is drawn connecting the Feb 1 high with late July highs, and a clear bullish break was seen on October 4.
Following the channel break, the pair posted a marginal high above prior September highs to set a succession of higher highs and higher lows. The prior high was posted on September 2 at 104.32. USD/JPY broke above the level on October 12 and has reached a high of 104.63 for the month thus far.
On a 4-hour chart, the pair has made a bullish break above a declining trendline that connects October 12 highs with October 16 highs. The break higher was made on Friday.
The pair consolidated during the Asian equity session today. A range break lower following the equity close was met with support at 103.71 in early European trading. Following a push back to the early day range, a bullish break is seen during early North American trading with the pair scaling resistance at 104.15.
USD/JPY has struggled to make a sustained break of the 104.00 handle, but the declining trendline break supports a bullish scenario for a continuation of the uptrend seen earlier in the month.
The US Dollar index (DXY) has posted three consecutive weekly gains with a clear technical break taking the index to eight-month highs further adding to a bullish scenario for the currency pair.
Positioning in the Japanese Yen does not reflect the same risk as it did at the start of the month, nevertheless, there remains some risk to the upside in USD/JPY as there is a large Yen net long held among non-commercials. The latest COT data indicated a third consecutive draw in the net long position for the week to October 18. The deterioration in Yen sentiment is supportive to the trade. The net long stands at $4.6 billion, down $1.1 billion from the prior week, and down from a reading of $8.6 billion in the week to September 27.
This week should drive volatility to the pair as there is notable economic data on the calendar for both the Yen and the US Dollar. Already released earlier today were trade balance figures from Japan that indicated a surplus of 349 billion Yen. Also released were manufacturing PMI figures that improved to 51.7 in October.
Out of the United States, consumer confidence is scheduled for release on Tuesday, durable goods order on Thursday, and advance third quarter GDP numbers on Friday. Out of Japan, the most important release this week will be the latest inflation numbers. National and Tokyo CPI figures are scheduled on Thursday at 19:30 EST and BoJ CPI will be reported on Friday at 1:00 EST.
There are two levels of interest overhead. The first horizontal level at 105.18 references highs from 2013 and a spike low in October 2014. The level also carries confluence with a 50% Fibonacci level measured from May highs to June lows. The next level seen at 106.13 held the pair higher on a daily basis in early May to trigger a 27-day recovery. The level once again acted as resistance ahead of the EU referendum. The take profit has been set at the second level.
To the downside, support is seen at 103.71 as the level held the pair higher on Friday and once again today. Friday’s spike low at 103.52 is seen as important as the figure was printed when the exchange rate retested the declining trendline. The stop loss for the trade has been set at the spike low.
The entry for the trade setup will be at the market price.
Entry: At market
Risk to Reward: 2:1
Time Frame: Two weeks