Yen Strength Returns: USD/JPY, EUR/JPY Sell-Offs Gain Steam

JPY, USD/JPY EUR/JPY Talking Points:

• Japanese Yen strength continued through the end of November and both USD/JPY and EUR/JPY set fresh lows to start this week.
• The US Dollar set a fresh two-year-high two weeks ago but notably, USD/JPY did not, setting a lower-high and leading into last week’s sell-off.
• EUR/JPY could be a more enticing venue for Yen-strength scenarios as EUR/USD has been breaking down of late, given that additional weakness in the Euro.
• I look at short-term price action around the JPY in each Tuesday webinar, and you’re welcome to join: Click here for registration information.

The Bank of Japan is expected to release a policy review later this month, just a day after the FOMC rate decision, and JPY-strength has started to show more prominently against most major currencies.

In USD/JPY, the US Dollar hasn’t been very weak over the past few weeks, but JPY strength has started to take on greater prominence of late. The pair set a fresh high on November 15^th as USD-strength drove after the U.S. Presidential election. Resistance eventually showed at the 76.4% Fibonacci retracement of the July-September sell-off; but a week later, as USD jumped up to a fresh two-year-high in DXY, USD/JPY lagged, setting a lower-high and building within the confines of a descending triangle formation.

I looked at that formation in last week’s webinar, just ahead of the U.S. holiday, and that formation filled in later that day and continued to see bears go to work as USD/JPY drove below 151.95, 150.77 and, eventually, the 150.00 handle.

And even today, to start the week, DXY is showing a bounce up to the 106.51-106.88 zone and USD/JPY is much less decisive, showing currently as a doji on the daily. This illustrates Yen-strength against the USD.

USD/JPY Four-Hour Chart

USD/JPY Daily

From the daily chart, we can see where there’s been quite a few inflections from the July-September Fibonacci retracement. The current high shows right at the 76.4% retracement, and last week’s support for the descending triangle was right around the 61.8% marker. The 50% level from that same retracement setup was support last Wednesday and then resistance to start this week, and that also points out the 38.2% retracement level as a deeper support, plotted around the 148.13 level.

But the bigger question is whether USD/JPY is an optimal venue to seek out that Yen-strength as the US Dollar has been strong against many currencies recently, especially the Euro which is back below the 1.0500 handle.

USD/JPY Daily Price Chart

EUR/JPY

While the USD remains very near recently-established two-year-highs, it’s been a far tougher road for the Euro.

I focused in on the difference between EUR/JPY and USD/JPY a couple weeks ago and at the time, USD/JPY still had bullish scope. EUR/JPY, on the other hand, had just set a fresh lower-low and was holding resistance at a big spot on the chart. There was also a relationship with the 200-day moving average, where EUR/JPY was trading below its 200-dma while USD/JPY and even GBP/JPY held above their own.

But since then, Yen-strength has returned in a big way and now all three pairs are now operating below their 200-day moving averages. As the descending triangle in USD/JPY broke down last week, EUR/JPY had even more steam as Euro-weakness was meshed with Yen-strength. And while the trend has been clean and aggressive, the pair is now showing oversold conditions on the daily chart, which can make it difficult to chase, at this point. Support is currently showing at the trendline projection, taken from August and September swing lows.

EUR/JPY Daily Price Chart

EUR/JPY Shorter-Term, Strategy

Oversold conditions on the daily chart do not necessarily preclude bearish continuation scenarios. It does make the prospect of chasing prices lower a bit more daunting, but a look at the trend over the past couple of weeks shows healthy two-way price action, and that’s something that can be tracked for those looking to take the trend-lower.

There was a support bounce around the 158.04-158.24 zone, and that remains of note as there hasn’t yet been a resistance test at that prior support. Inside of that, a Fibonacci level plots at 157.31 and that’s similarly of note, as that’s the 76.4% retracement from a major move that showed support at the 38.2, 50 and 61.8% retracements.

That 61.8% retracement of prior support is also of interest if bulls can stretch a pullback, and that plots at 159.10. Even the 160.00 level could be of interest and as I highlighted in the video, the key there would be bears defending the prior swing high at 160.34. If they fail to hold the lows below that price, then the prospect of a larger retracement or pullback move will look more prominent and at that point, bears will likely want to re-assess.

EUR/JPY Four-Hour Price Chart

--- written by James Stanley, Senior Strategist