USD/JPY Losses Upside Momentum

USD/JPY rebounded on Thursday after setting a new low for the recent sell-off at 110.24, the lowest level traded since November 18th. The pair advanced to 111.73 on Thursday, but has since struggled to break above that area. At present, USD/JPY is trading at 111.38, down 0.08% from Thursday’s North American close. At 111.38, the pair is currently down 1.7% from last Friday’s close.

The dollar has been under pressure throughout the majority of this week due to political turmoil in the US, while the safe-haven yen has benefited. On Wednesday, it was reported that US President Trump asked former FBI Director James Comey to end the investigation of former National Security Advisor Michael Flynn. This news sparked concerns over obstruction of justice charges against the President, an impeachable offense. This development was the impetus behind Wednesday’s US equity market rout, during which the major price indexes experienced their worst day of losses so far this year. The concern is that the controversy will derail efforts by President Trump to implement his economic stimulus plans.

Then on Thursday, Reuters reported new developments regarding the investigation into Russia’s alleged interference with the 2016 US Presidential election. According to Reuters, the Trump campaign had at least 18 undisclosed contracts with Russians. Specifically, Michael Flynn and other advisers to Donald Trump’s campaign were in contact with Russian officials and others with Kremlin ties in at least 18 calls and emails during the last seven months of the 2016 presidential race. A special counsel has been appointed to investigate Russia’s involvement with the election.

While the dollar was able to gain come ground on Thursday following the release of several better than expected economic reports, upside momentum has since waned and the US dollar index (DXY) which measures the greenback’s strength against a basket of six major currencies, is currently trading at 97.43, a loss of 0.46% from Thursday’s close.

Most recently, the yen appears to be benefiting from its safe-haven status amid the political upheaval in Brazil. Brazilian asset prices have plummeted as Brazilian President Michael Temer faced allegations that he condoned bribes to silence a key witness in a corruption probe, calling into question investor optimism about the prospects for his ambitious pension and labor reform agenda. Temer has refused to resign. The iShares MSCI Brazil Index Fund ETF (EXZ) plunged more than 16% in reaction to the events.

The yen is expected to continue to benefit from the various political developments impacting the markets and weak upside momentum has been demonstrated in USD/JPY, as the pair failed to reach first resistance at 111.95, which defines the mid-point of Wednesday’s long red candle on the daily chart, during Thursday’s rebound attempt. The inability to clear this level keeps the door open for a retest of the recent reaction low at 110.24 over the near term. This low corresponds to a 61.8% Fibonacci retracement of the advance from the April corrective bottom to the May rally high. Thus, a move to new reaction lows would confirm a break of this retracement, a development that would increase the probabilities of a complete retracement with a move back to the 108.00 level.

Ahead of the 108.00 level, initial support for USD/JPY is at Thursday’s 110.24 low, followed by 109.50, which represents the approximate level of the lower boundary of the gap created as a result of the strong open on April 24th in reaction to the outcome of the first round of the French Presidential election.

With the Stochastic still at a depressed level and the US economic calendar void of releases today, continued consolidation could characterize price action heading into the weekend. However, the broader bias remains to the downside and an eventual test of the 108.00 level is expected. Thus, periods of strength appear best used as selling opportunities.

There is the potential for some volatility today, as the FOMC’s Bullard is scheduled to speak at 09:15 ET. Bullard, the President of the Federal Reserve Bank of St. Louis, is a non-voting member of the FOMC. However, he will speak on the US economy and monetary policy and could give clues as to the Fed’s next move. Federal Reserve Bank of San Francisco President Williams will speak in the afternoon. He also is a non-voting member of the FOMC.

At 15:30 ET, the latest Commitment of Traders report from the Commodity Futures Trading Commission will be released, with data as of the May 16th close. The last report, with data as of May 9th, indicated that large speculators were net short Japanese yen futures by 36,307 contracts. This represented an increase in short positioning by 5,824 contracts from the prior week.
Next week, on Sunday at 19:50 ET, Japanese Trade Balance data will be released. The next potentially high impact report is due Thursday at 19:30 ET, when National and Tokyo CPI data will be released.

In the US, Monday’s calendar is clear of data releases. On Tuesday, at 10:00 ET, New Home Sales will be reported.

USD/JPY Daily Chart

USDJPY_051917

Tracy L. Morganthall, CMT, has been a Technical Market Analyst for more than 20 years. She has experience analyzing and producing reports on equities, both domestic and international markets, as well as Forex and commodities. She attended Trenton State College in Trenton, New Jersey, earning a Bachelor's in Finance.