USD/JPY signals heightened downside risk

<p>USD/JPY technical indications have been signaling heightened downside risk for more than a month, since the current consolidation phase began in late August. Prior to […]</p>

USD/JPY technical indications have been signaling heightened downside risk for more than a month, since the current consolidation phase began in late August. Prior to this consolidation, August’s sharp plunge displayed how vulnerable the currency pair can be to volatility in the equity markets.

As global economic uncertainty continues to plague jittery investors, the relative perceived safety of the Japanese yen may be expected to attract further asset flows. While this phenomenon may place increased pressure on USD/JPY, dollar-supporting expectations of a 2015 rate hike by the Fed should help to mitigate at least some of the currency pair’s downside risk potential.

With that being said, however, the USD/JPY chart is painting a rather bearish picture. In August, the previously-rising 50-day moving average began to roll over and start to converge towards the 200-day moving average. This convergence has now essentially been achieved as the two moving averages have touched. This type of convergence has not occurred in well over a year, and could be the harbinger of a significant downside turn.

USD/JPY Daily Chart


In the event of a follow-through of the convergence with an actual cross of the 50-day moving average below the 200-day, a technical “death cross” will have occurred, which could presage a potential bearish trend change.

More immediately, USD/JPY is currently trading below the key 120.00 level and approaching the bottom border of a converging triangle pattern that has been in place since late August. A breakdown below this triangle pattern on volatility-driven yen-buying and/or a pullback of US dollar strength could spark a significant fall for the currency pair. In the event of this breakdown, the next major downside targets are at the 118.00 and then 116.00 support levels. Upside resistance on any rebound above 120.00 continues to reside around the upper border of the noted triangle pattern.

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