USD/JPY – Sell the Rally

USD/JPY – Sell the Rally

Don’t be fooled by the fragile recovery in currencies because China is still in trouble and poised to bring greater pain for USD/JPY. Investors completely ignored the decline in Chinese stocks overnight – the Shanghai Composite Index dropped 5.3% while the Shenzhen Composite fell 6.6% with both indices closing at their lows and we think that is a big mistake. The China story is not over and chances are there could be renewed weakness in the currency this week as the government struggles to control market moves. Chinese trade numbers are scheduled for release and it should be weak as long as the data is not manipulated. As for data, lower oil prices and weaker wages should weigh on Friday’s retail sales report while market volatility will most likely hamper consumer confidence. Also the latest CFTC report from the shortened Jan 5 trading week showed speculators turning net long yen (or short USD/JPY) for the first time in 3 years. Position adjustment such as these are typically consistent with major turns in the currency. We anticipate renewed weakness in USD/JPY this week.

Technically USD/JPY is oversold and we see the currency pair potentially bouncing towards resistance, which is between 118.50 and 119. However it should fail near that level and make a move towards the August low of 116.20. There’s also a major head and shoulders pattern forming in USD/JPY with 116 as the neckline.

Chart Of The Day

Leave a Comment

Your email address will not be published. Required fields are marked *