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USDJPY to 110?
USDJPY to 110?
The big story in the foreign exchange market today was USD/JPY and its quick slide below 112. The currency pair has fallen 5 out of the last 6 trading days with the latest wave of weakness taking USD/JPY to its lowest level since November. We can identify at least 3 reasons for the persistent decline in the currency – first and foremost investors are nervous about the economy and President Trump’s policies. Friday’s jobs report failed to impress with wage growth slowing and the unemployment rate rising. More importantly, Trump has been on a campaign to pressure other countries to strengthen their currency which effectively means he wants the dollar to weaken. Secondly, ten year yields fell 5bp today, pushing the dollar lower and when 112, an important support level for USDJPY broke the currency pair extended its losses quickly. The problem is that data has not been strong enough to convince the market that the Federal Reserve will raise interest rates in March and to offset the President’s push for a lower currency. Stocks are also beginning to roll over and if the slide deepens, it would fuel risk aversion that could turn into additional pressure on USD/JPY. With no major U.S. economic reports scheduled for release this week, we look for USD/JPY to extend its losses towards 110. The November 28th low near 111.36 could provide some support but we continue to look for losses beyond that level.
Technically the monthly chart provides a clearer picture of the outlook for USD/JPY. Having broken below the 23.6% Fibonacci retracement of the 2011 to 2015 rally which happens to coincide with the 23.6% Fib of the June to December 2016 rise, the currency appears poised for a stronger move lower. There is some support between 111.36 and 111.25 but the real significant support level is down at 110.00 and as long as USDJPY remains below 114, the downtrend remains intact.