Originally published by AxiTrader
The rollercoaster that is dollar-yen continued again yesterday as generalised US dollar weakness intensified in early Asian trade. That heavy selling pressure on the Buck came after newswires reported that incoming US treasury secretary Steve Mnuchin said a dollar that was too strong would hurt the economy.
That's not exactly fresh news. Anyone with even the most cursory understanding of the economics of trade in goods and services knows that a strong dollar will lead to some leakage in US growth into the broader global economy. saw generalized US dollar weakness with the yen the primary beneficiary.
But Mnuchin's comment again brings into focus one big unanswered question forex traders - and global investors more braodly - are wondering right now. That is, what exactly will this new administration's policy be for the US dollar.
Already we know president trump favours a weaker dollar so the strong dollar will stop "killing us" as he put it to the Wall Street Journal last week. And Mnuchin's comment seemed to reinforce that.
But while the US dollar was weaker across the board it retained support in dollar index terms.
And, for the second week in a row the Yen ran into a wall of selling once USDJPY fell into the 112.50/70 zone yesterday. That makes four days where USD/JPY has found support in this zone as the chart below shows.
USD/JPY is now a per cent higher at 113.77.
It's a clear signal that the buyers see some value in USD/JPY around the 112.50 level.
No doubt a big part of that is continued expectation of strong policy divergence between the Fed and the Bank of Japan which will drive interest rate differentials sharply in the US dollars favour.
That's something both Fed chair Janet Yellen and BoJ governor Kuroda highlighted last week. Kuroda then again reiterated that he will keep policy in Japan accommodative even though he has a more upbeat outlook on the economy and inflation in the year ahead.
So what's next for USD/JPY?
The daily chart clear shows strong support at 112.50/60. That's above the 38.2% retracement level I've been watching at 112 but in the general vicinity and only a break of 112 would be bearish, rather than consolidative, for USD/JPY.
I say that because after such strong moves - the likes of which we have seen in USD/JPY since the US presidential election - a 38.2% retracement is usual. As such it is not outright bearish - simply consolidative.
Looking at the 4-hour chart gives a slightly more granular take on USD/JPY.
The double bottom is clear and the overhead resistance line is obvious.
Before that though this 113.88/91 region is the 50% retracement of the recent selloff. A move above here would suggest a run back to 114.22 (61.8%) and if that breaks the trendline at 114.75 is in the frame.
If USD/JPY can't break 118.90ish a move back into the high 112's, low 113's, seems like to see if support is really there.
Have a great day's trading.