USD/JPY Technical Set Up Continues To Deteriorate As Bears Maintain Control

Includes: FXY, UDN, UUP
by: FXstreet

The USD/JPY has suffered steep losses over the last few days, with many analysts pointing towards the Bank of Japan's decision to keep current monetary policy unchanged at its most meeting as a main reason for the declines. However, not all analysts are so sure about this, with some saying the global risk aversion theme and sharp declines in the equity market have also had an effect on the USD/JPY as previous 'risk on' trades begin to unwind.

Derek Halpenny, European Head of Global Markets Research at Bank of Tokyo Mitsubishi UFJ discussed some of his thoughts on the recent sharp declines in USD/JPY. "The yen advanced significantly yesterday [Wednesday] with most citing the BOJ unchanged monetary policy decision as a key factor. However, we are not sure the USD/JPY rate would be at a greatly different level from where we are now if the BOJ had changed its stance and provided additional liquidity in order to help stabilize the JGB market. So, really, the yen move was more about the global risk aversion that intensified again yesterday rather than disappointment with the BOJ's unchanged monetary stance," Halpenny added.

In further discussing his views, Halpenny went on to mention a few other reasons (other than BoJ policy) he believes the pair had risen so sharply since last fall, noting improvement in risk appetite due to improving economic data as a supporting catalyst. "The surge in USD/JPY has of course been predominantly about 'Abenomics' but it is important to remember that the gradual improvement in the U.S. economy and favourable global financial market conditions induced in Europe by OMT by the ECB also played roles in lifting USD/JPY from November last year." In concluding his views, Halpenny stated, "We are now in the most unsettled financial market conditions since last summer and with 'Abenomics' under scrutiny with doubts over the credibility of the third arrow, a sharp unwind of yen short positions has been triggered."

Sean Lee of FXWW was giving his take on the recent volatility in USD/JPY, noting the bears are still in control at the moment but the longer term uptrend off the lows from November remains intact. "Bearish momentum is very strong at the moment but bulls shouldn't give up hope as they have the strong long-term trend in their favor," Lee commented.

In further discussing his view, Lee went on to add, "If you can remember back to the extreme volatility we had after the BOJ April meeting? I remember it well because I was short going in to it and managed to buy those back at JPY93.40 just after the statement was announced. Clever move indeed, but not clever enough to go long as it rallied 1000 pips from there." Lee later went on to mention he believes the JPY93.00/93.50 area will be an critical support for the bulls to hold in order to help keep the longer term uptrend intact.

Fan Yang,CMT, Chief Technical Strategist at FXtimes went on to share some of this recent technical views, with a particular focus on recent developments from shorter-term time frame charts. Yang commented, "The 1H chart shows a market that was in a small flag consolidation since late 6/11 - early 6/12 session. As the 6/12 U.S. session began, it fell below the mini-correction pattern, and the market could be extending the bearish swing that came down from around the JPY99.00 handle. " Yang later went on to comment the above price action followed the BOJ's recent decision, and in his view is beginning to look like a market making a transition from bullish to bearish.

In further discussing his view, Yang moved on to discuss a few levels market participants should keep an eye on over the next few sessions. "The June low is just below JPY95.00, and price action looks like it wants to test it. If it holds again, we might consider this to be this year's support. Otherwise, a break below JPY95.00 opens up the JPY93.00 handle, JPY92.96 (38.2% retracement), down to the JPY92.55 support pivot in the short-term (refer to the daily chart)", Yang concluded.

From a longer-term technical perspective, there is no doubt the recent sharp declines have helped deteriorate the strong technical set up which used to exist on the USD/JPY daily chart. For example, price has not traded above either the 9 or 20 DMA's since back on May 30th when the pair was still above JPY100.00. Furthermore, the 9 DMA has made a bearish cross below both the 20 DMA and 50 DMA, indicating selling pressure may continue to increase as important support levels are taken out. From a momentum perspective, the RSI (14) broke below the 40 level (on June 6th), indicating a bearish momentum shift had taken place. This was the first bearish momentum shift the RSI had completed on the daily chart since September 2012. To conclude, all of the above mentioned technical developments may continue to help fuel a sell the rally mentality as we progress throughout the month.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.