USD JPY continues plunge as stocks tumble dollar weakens

USD/JPY continued to plunge on Thursday as the dollar weakened and a flight to the relative safety of the Japanese yen intensified amid tumbling global stock markets.

Overnight, trading in Chinese stocks was suspended early due to more than a 7% drop in China’s benchmark stock index. This was the second time this week that circuit breakers triggered a trading suspension. Major global indices in Europe and the US subsequently fell in response, leading to a further flight to safe haven assets like gold and the yen.

Exacerbating this drop for USD/JPY was a further weakening of the US dollar that was initially triggered on Wednesday by the release of the minutes from December’s FOMC meeting. In those minutes, it was revealed that some members expressed concern over low inflation and felt some unease with regard to raising interest rates.

This hit to the dollar was followed up on Thursday morning by US weekly unemployment claims. While jobless claims in the US fell by 10,000 from the prior week, the number came out above prior consensus forecasts, which further weighed on the dollar. Friday brings the eagerly anticipated Non-Farm Payrolls and Unemployment Rate reports for December, which could make a significant market impact in the wake of last month’s US interest rate hike.

From a price perspective, USD/JPY has now reached down to hit and tentatively dip under its major downside target at 118.00. Since the latter half of December, the currency pair has been falling in line with increased yen strength due to heightened volatility in the equity markets as well as a consolidating US dollar.

Led by economic and financial troubles in China, major stock markets could continue to experience high volatility well into this new year, potentially placing additional pressure on USD/JPY. With any sustained trading below the noted 118.00 level, the next major downside target is at the 116.00 support level, last hit one year ago at the beginning of 2015.