USD, JPY & EUR/JPY

<p>USD/JPY is up 0.57% on Tuesday, posting its biggest one-day percentage rise since June 21 and approaching a key combination of resistance levels near 78.80; […]</p>

USD/JPY is up 0.57% on Tuesday, posting its biggest one-day percentage rise since June 21 and approaching a key combination of resistance levels near 78.80; the trendline extending from June 25; the 55-day and 55-week moving averages.

Most FX traders are familiar with the characteristics of both USD and JPY underperforming other currencies during improved risk appetite (rising equities) while outperforming during risk aversion. Japans zero interest policy prevailing since the mid 1990s has been behind investors carrying the trade machinations – borrowing in yen to invest in higher yielding currencies and financial assets. This practice escalated around 2004, leading to a clear inverse relation between the yen and equity indices (direct relation between yen crosses and equities).

USD’s safe haven status owing to the safety of US Treasuries and later the Fed’s zero interest rate policy were the main factors behind the USD’s inverse relation with equities during risk aversion.

Although the yen did lose some of these traits during the deepening recessions and deflations in 2009 and 2011, the relationship remains generally intact. The yen-selling interventions by the Bank of Japan September 2010, March 2011 and August 2011 succeeded in dragging down the currency for no more than 2-3 weeks, before the currency resumed its old ways.

The decline (increase) in the yen during equity rallies (selloffs) has been especially pronounced against the Aussie, loonie, Kiwi and sterling. EUR/JPYs declines have proven more considerable during risk aversion than EUR/JPY rallies during improved risk appetite.

What about USD vs. JPY?
Yet, one aspect remaining of relative mystery to traders has been the USD/JPY relationship. Since both USD and JPY behave similarly vs. others, how do they behave against one another? The general pattern has been for JPY to underperform all currencies including the USD (USD/JPY rises) during rallying stocks, especially when positive US reports are the cause of the gains. Conversely, the yen often outperforms USD (USD/JPY falls) during selloffs in equities.

The use of the above information can help in assessing implications for non-USD/yen crosses, whose movements tend to be greater than in USD/JPY. Exploiting higher volatility in non-USD yen crosses can be attained when technical signals emerge in USD/JPY. The characteristically limited nature of USD/JPY fluctuations may leave some traders frustrated, but these signals could be suggestive for other yen crosses.

Onto EUR/JPY
Today, the somewhat bullish dynamics for USD/JPY (see below) may suggest the stabilisation in EUR/JPY could accumulate fresh ground to a high of 97.80, which is just under the 55-DMA. The 55-DMA has not been broken since April. Weekly oscillators currently suggest only a 40% probability that the 80.00 figure will be broken. Support remains underpinned at the July 25 trendline, with 96.30 as final support.

USD/JPY
USD/JPY is up 0.57% on Tuesday, posting its biggest one-day percentage rise since June 21 and approaching a key combination of resistance levels near 78.80; the trendline extending from the June 25; the 55-day and 55-week moving averages. Subsequent barriers are not too far off above the 200-day MA at 79.20. Considering the positive near term oscillators on the daily chart and medium term oscillators on the weeklies, there stands a chance for USD/JPY to extend its run-up towards its 100 DMA (79.80). With upside surprises in US data such as Tuesday’s retail sales delaying the timing of any additional QE from the Fed, USD/JPY is likely to remain underpinned. A break above 79.00 seems inevitable, but the prospects for a definitive breakout above 80.10, remains unlikely, especially as the figure coincides with the 100-week MA, a technical figure prevailing over the last 19 weeks. Thus, the likely consolidation may emerge with a support at 78.20s and upside capped at near 79.80s. Such is likely to remain the consolidation for a non-inspiring (but consistent) two weeks ahead of the Jackson Hole Fed symposium later this month.

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