USDJPY: as the dollar sells off, watch the cloud

March 26, 2015

It looks like a combination of weaker US economic data; tensions in the Middle East and a sharp decline in the dollar index have started to bite USDJPY, which has fallen below 118.50 on Thursday. It is also coming up to fiscal year end in Japan, which can have a positive impact on the yen.

Key support ahead
The biggest short –term risk to this pair from a technical perspective is a break below the daily Ichimoku cloud at 118.20 (see the chart below). When prices fall below the cloud this can signal the start of a technical downtrend, and it could signal another leg lower in the US dollar sell-off.

The USD is one of the weakest performers in the G10 FX space. Since the FOMC meeting last Wednesday, only the British pound has underperformed the dollar. Even the EM FX space has managed to pull back some recent losses versus the USD, with the ruble up more than 5%, the Polish zloty up 2.7% and the South African rand up 1.5%.

USD weakens as the Fed focuses on inflation
Economic data is fairly thin on the ground in the European session; however US jobless claims data is worth watching along with comments from the Fed’s Lockhart who speaks later this afternoon. Comments from the Fed’s Bullard this morning sounded a warning note on the drop in inflation expectations and also said that US monetary policy is to remain “exceptionally accommodative”, which helped to take the shine off the buck. Although he acknowledged that the Fed can’t keep interest rates at the zero bound forever, the focus on weak price pressures could keep a lid on the dollar for the time being and could weigh on USDJPY.

The technical view:
The break below the 100-day sma at 118.84 was a bearish development; if USDJPY falls below the bottom of the cloud at 118.20 then it reinforces the bearish trend for this pair. A move below that level could open the door to a further decline back to 116.80 – the early February lows.

If USDJPY can manage to stay above the cloud, then key resistance is the cloud top at 118.75, ahead of 120.00, which corresponds with the Kijun and Tanken lines.

Figure 1:

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