Weekly Forex Update: USD/JPY

The USD/JPY continues to trend lower as the Yen remains strong against a U.S. Dollar that was stable, albeit range-bound, throughout Monday’s trading session.

The USD/JPY continues to trend lower as the Yen remains strong against a U.S. Dollar that was stable, albeit range-bound, throughout Monday’s trading session. The stronger Yen denotes risk aversion, as Yen is sold or borrowed primarily when risk appetite is present, as the purchase of more risky and higher-yielding assets are funded by borrowing (that is, selling) Yen, due to its low 0.10% Central Bank rate. Bullish equities movement is therefore best confirmed when Yen is sold against the Dollar and the Euro.

The Falling Wedge pattern on the USD/JPY’s daily chart shows that the bearishness over the last 40 candles has formed a strong downtrend; this is confirmed by Autochartist’s seven-bar Initial Trend reading. (Any reading greater than six bars indicates a trending market.) The current push lower towards support at the Wedge pattern’s bottom line shows that prices are likely to test the two prior lows at 86.97 and 87.02. A break of this area would also push prices closer to the downtrend line support waiting at 86.60 (A). However, don’t underestimate the support that is likely waiting at the whole, round number known as a “big figure,” as price levels ending in “00” are sometimes called. If prices can rally from the pattern’s support, look for selling pressure to be waiting at 90.20 (B).

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If the downtrend persists, it will confirm that the Yen is maintaining its strength against the U.S. Dollar and that risk aversion is dominating market psychology. Subsequently, the current test of resistance at 10380 (E) in the Wall Street Cash index is likely to fail.

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The exhaustion just above what was a low-momentum breakout of the Falling Wedge on the Wall Street Cash’s daily chart shows the consequences of a bullish move in equities that occurred without the selling of Yen. The reversal of the Falling Wedge, however, would have been an aggressive entry long, or an Autochartist Correction of the Trend (ACT) entry, due to other factors. The move through resistance occurred within an environment with a strong, ten-bar Initial Trend reading, meaning that the breakout was a trend-reversal entry. Strong trends such as this do not reverse easily, and are best entered only if there is strong momentum accompanying the reversal. This pattern broke with a low, one-bar Breakout reading, which pointed to very little bullish momentum behind the pattern’s reversal move higher. Couple this with the strong Yen, and the bulls were fighting an uphill battle all the way.

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