USD/JPY Chart – Sell into the Rally
USD/JPY has been on a wild ride this month. Having dropped over 1000 pips in 2 weeks, the currency pair rebounded more than 400 pips in 3 trading days but fundamentally we believe there’s another round of weakness before stabilization. In the last 24 hours, we’ve seen a strong recovery in risk appetite because investors were relieved that Chinese markets did not open sharply lower. Although China’s trade surplus increased, imports and exports fell significantly, pointing to continued weakness in China’s economy. Japan’s economy also contracted in the fourth quarter, making the rally in the Nikkei overnight undeserved. We believe that Wednesday’s FOMC minutes will remind investors how low the chances are for a rate hike from the Fed next month and this could be just the catalyst that the dollar needs to make another move lower.
Technically, we view the recent rally in USD/JPY as a correction within a broader downtrend. We expect the bounce to exhaust near 115. Not only is this an important psychological level but it is also right at the 100-week SMA. If this level is broken, the spike lows near 115.50 still needs to be broken for a stronger move back towards 117. However if the currency pair resumes its slide, support will found at the 50% Fibonnaci retracement of 1998-2011 move near 111.75.