Originally published by AxiTrader
Key Takeaway
The bears have it and USDJPY is under heavy selling pressure in late new York trade.
That's seen the yen strengthen across the board as traders pushed USD/JPY below the important 112 support zone. That's taken the price below the 38.2% retracement level and shows the USD/JPY bears are firmly in control.
Chartists will now be looking at 109.50/90 region which is both the 50% retacement of the Trumponomics rally in USD/JPY and the 138.2% projection of the recent volatile downmove.
But the big question for many traders is whether this is the start of a much deeper USD/JPY consolidation, perhaps a trend reversal, or just the search for support before USD/JPY inevitably bounces again.
What You Need To Know
Yesterday Japan's Mr Yen, former vice minister of finance for International Affairs and the man who caused forex traders to quake when he spoke, reiterated a call made last year that USD/JPY will trade back under 100 later this year.
In the run up to the meeting between president trump and Japan's prime minister Shiinzo Abe later this week Sakakibara said "Trump attaches great importance to domestic employment, which means that he needs to boost exports. In order to do so Trump is leaning to a weak dollar policy by, for example, criticising Japan for adopting weak yen policy'.
That's something that the president and his trade representative Peter Navarro made abundantly clear last week.
On the same day that Navarro said Germany benefitted from the weak euro - something the German finance minister effectively agreed with over the weekend - President Trump said:
"A lot of the companies have moved out, they don't make the drugs in our country anymore. A lot of it has to do with regulation, a lot of it has to do with other countries take advantage of us with their money and their money supply and devaluation. Our country has been run so badly, we know nothing about devaluation; every other country lives on devaluation. You look at what China's doing, you look at what Japan has done over the years, they played the money market, they played the devaluation market and we sit there like a bunch of dummies, so you have to get your companies back here."
So Sakibara has a strong point. And I agree that the president seems destined to abandon the strong dollar policy that has been in place since Robert Rubin introduced it 20 years ago.
But there is a strong chance also that the president himself seeks to become a "devaluer" and use the US dollar as a tool of trade policy.
Combine that with a market that is long US dollars, and still short Japanese yen and the preconditions for an unexpected fall in USD/JPY below 109.50/110 could be on the cards.
Equally problematic for the USD/JPY bulls is what is going on with European politics.
As Marine Le Pen's star rises traders and investors will be concerned about the future of the euro. While the pundits say here chances of actual victory remain limited due to the run-off process it is something traders are clearly taking seriously. Last night Spanish 10 year bonds hit their highest level in almost 5 years, Italian 10's hit a 2 year high, and French bonds themselves hit a 16 month high. German bonds however rallied.
As the natural safe haven in forex markets, along with the Swiss franc, the yen stands as a major beneficiary of this disquiet over the euro project.
So the chances are we see a stronger yen than many, including myself, expected just a couple of week's back.
But that's a possibility, and while it's probability is growing it is still not most traders base case.
So for a road map we look to the charts to see what the technical outlook suggests.
On USD/JPY itself the break of 112 suggests a move toward the at 109.50/90 region which is both the 50% retacement of the Trumponomics rally in USD/JPY and the 138.2% projection of the recent volatile downmove.
The bears have control at the moment. But rather than forecast doom all I can say is my system is targeting a move below 110 and then I'll see how things go.
For EURJPY at the moment it too is breaking lower. It's slipping out of the recent range. But 119.70 is the key 38.2% retracement level of the recent rally.
This could end up being a good medium term trend with a tentative target I've penciled in if 119.70 breaks of 117.30/80.
Have a great day's trading.