USD/JPY forms double-bottom, but is the plunge over?

<p>USD/JPY rose in afternoon trading on Thursday as equity markets extended the previous day’s reversal rebound on higher crude oil prices. Despite a drop in […]</p>

USD/JPY rose in afternoon trading on Thursday as equity markets extended the previous day’s reversal rebound on higher crude oil prices. Despite a drop in crude oil early on Thursday, prices recovered moderately after it was reported that major OPEC countries and Russia agreed to meet in March to discuss a proposed oil output cap at January’s levels. This boosted both the West Texas Intermediate and Brent Crude benchmarks, which helped to lift slumping equity markets. In turn, as equities rose, so did the closely correlated USD/JPY currency pair, which extended its climb off a clear double-bottom pattern on the daily chart.

With global stock market volatility having become the norm since the beginning of the year, USD/JPY has seen precipitous declines recently, especially since the beginning of February when the US dollar also depreciated substantially. Those declines culminated in an early February low slightly below 111.00, before a relief rebound occurred that tracked stabilizing equity markets. Earlier this week, the currency pair once again plunged to hit a low around the 111.00 level as crude oil uncertainty resumed its grip on global stock markets. This re-test of 111.00 created a potential double-bottom chart pattern that could presage at least a temporary bottoming of USD/JPY.

Possibly supporting this view is the ever-present potential for a currency intervention by the Bank of Japan, with the aim of curbing unwanted appreciation of the yen. With regard to this, two unknowns persistently remain: 1) around what level would the Bank of Japan intervene? And 2) would intervention really have any lasting impact on keeping the Japanese currency down in the face of continuing market volatility that boosts the safe haven yen?

These questions remain to be answered, but what is currently known is that financial markets continue to sustain a generally fearful environment, and the recent trend for USD/JPY has been unmistakably to the downside. Therefore, barring any major stock market recovery or drastic Bank of Japan intervention, USD/JPY remains pressured. If this continues to be the case, the current double-bottom pattern could simply be a moment of respite within a continuing slide.

Any sustained breakdown below the noted 111.00-area lows would confirm a continuation of the downtrend. In that event, the next major targets to the downside reside at the 110.00 and then 108.00 support objectives.

USD/JPY Daily Chart

 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.