USD JPY steadies on lower equities volatility

With the US dollar relatively mixed against other major currencies in early September, the USD/JPY currency pair has been driven to a significant extent recently by the Japanese yen’s reactions to volatility in the global equities markets.

Specifically, the yen’s traditional role as a safe haven currency in times of market turmoil has been validated as of late, as the Japanese currency has risen and fallen in fairly close correlation with equity indices.

This can be seen most readily on USD/JPY three weeks ago when the dramatic plunge in major market benchmarks spanning the S&P 500 to the FTSE 100 to the DAX, which was triggered in part by financial and economic turmoil in China, prompted a flight to the yen and a spectacular fall for USD/JPY.

That fall brought the currency pair down to approach major support around the 115.50 level by the last full week of August before rebounding and paring some of those losses. Late August and early September, however, brought a fresh wave of yen buying that further pressured USD/JPY.

The beginning of the current week has seen the currency pair steady as most major equity markets, including China’s, have experienced a rebound, and market volatility has decreased substantially from the previous week.

From a technical perspective, the sharp plunge for USD/JPY that began three weeks ago effectively broke down below the prior uptrend. In the process, the currency pair also dropped below the key 200-day moving average, a technical event that has not occurred for over a year, since August of 2014.

While this week’s early rebound has moderately brought price back up around the key 120.00 support/resistance level, any continued economic trouble in China and global equities markets should place further pressure on USD/JPY as the flight-to-safety mentality potentially continues.

Of course, a possible Fed rate hike either in September or December this year, which could give a further boost to the US dollar, should help mitigate more extensive losses for USD/JPY.

As the currency pair is currently trading just below the 120.00 level, any significant return of market volatility could prompt USD/JPY to fall back towards the 118.00 support level, with a further breakdown targeting the noted 115.50 support.

To the upside, any further rebound on US dollar strength above 120.00 should find major resistance around the key 122.00 level.