USDJPY: Finding support at 98.45

USDJPY was the main mover overnight after breaking below the 99.00 handle. Yesterday, we mentioned that key 50-day moving average support at 99.30 should hold due to the USD enjoying a positive yield differential with Japan (see more here). However, two fundamental events scuppered this view:

A Wall Street Journal article that the Fed would keep its QE3 programme in place at its meeting next week, reducing hopes for an early start to tapering.
Reports that several Senators are planning on supporting uber-dove Janet Yellen (current vice chair at the Fed) to become the next chair once Bernanke leaves in early 2014. This could lead to 1, a reassessment of the pace of tapering and 2, the potential for a pledge to keep rates lower for an even longer period that currently expected.

This is a keen reminder of how important news events can be for the forex market.

The yield effect

USDJPY reached a low of 98.45 – the 100-day moving average, which continues to act as support. The spread between US and Japanese government debt has been fairly volatile over the last 24 hours. The difference between the 10-year bond yields is widening and is USD positive, while the 2-year rate spread is narrowing, which is USD negative. Shorter term bond yields tend to be more volatile than longer term yields, so while the longer term outlook could still be positive for USDJPY, in the short term the USD could still come under pressure.

Technical view:

This cross is looking oversold in the short term and could be due a pullback.
However, the bearish crossover in the daily MACD suggests that momentum could be to the downside on a slightly longer time frame as we lead up to next week’s FOMC meeting and NFP report.
Short term resistance comes in at: 98.90, the daily pivot, then 99.25 – the 50-day moving average.
Watch out for the weekly close, blow 98.45 is a medium-term bearish development.

Takeaway: USDJPY is starting to look oversold and may be due a pullback, however, momentum is still on the downside, so we may see further weakness into next week when we get key US event risks: Q2 GDP, FOMC meeting and NFP report. Thus any strength in this cross may act as a selling zone.

Source: Forex.com

26.07.2013