USD/JPY: 102 Intact, Despite Early Morning Scare

USD/JPY suffered early losses during Monday open, retreating from above 103 to hit 102 within 30 minutes. The fast decline was attributed to Japanese Economy Minister Amari’s speech, in which he stated that the continued weakening Yen would eventually affect Japan negatively, and the Japanese Government’s job is to neutralize such threats. According to Amari, Yen has “corrected a lot”, suggesting that the Government may be viewing current Yen rate as too weak, with the ideal target perhaps closer to 100.0. Should the Government consider current USD/JPY be too high, it is unlikely Kuroda et al will be given continued free reign to push USD/JPY lower.

Hourly Chart
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Unfortunately for the bears, the quick sell-off failed to push prices below the 102.0 mark. Price rebounded from 102 and climbed back above 102.5 in quick fashion. This is a very significant sign of bullish intent. Despite being able move above 102.50 significantly and broking 103.0, the breakout on Friday is highly suspicious as it occurred on a Friday, where liquidity tends to be thinner and hence any directional movements may be over-exaggerated. Furthermore, it was against the grain with prices posting lower highs from 15 – 17 May until the breakout happened. There were some fundamental news in the form of better than expected U. of Michigan Confidence that drove prices much higher, but generally such sentiment surveys tended not to invoke huge reactions, and the fact that USD/JPY rallied strongly after that on USD strength raised some eyebrows and added to the possibility of overreaction given the arguments stated earlier.

Hence the ability for price to recover above 102.50 is important as it affirms that overall bullish pressure remains intact and decrease the likelihood of the move above 102.5 as a fakeout. With Price continuing to maintain itself above 102.5, a move back towards 103.0 comes back into play and at the same time opens up for further highs to be reached.

Daily Chart
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Daily Chart is less optimistic though, with price looking to be capped by the rising trendline that has been in play since March. However it is worth noting that price did not enter into a full bear trend after tagging the rising trendline on the previous 2 occasion, and given current overall bullishness, a scenario of USD/JPY collapsing back below 100.0 is hard to buy in. Nonetheless, a short-term pullback is still possible, which is in line with what short-term stochastic readings are showing.

This lead us to a conundrum – there are signs that pullback is possible, yet overall bullishness remains intact. In such scenarios, traders tend to favor breakout trades as it would be in the direction of the trend and is in-line with the overall strong bullish assessment. However, given how price pulled back more than 100 pips in 30 mins on a seemingly innocuous comment by Amari, even such strategies become risky. Bottomline: we could be seeing the top for USD/JPY soon given recent stronger bearish convinction, but don’t bet on it.