USD/JPY hangs in the balance

The escalation of nuclear tensions between the US and North Korea has been the biggest story since last night. Market participants dumped risk-sensitive assets, including stocks, and evidently moved into perceived safe-haven assets including gold, Japanese yen and Swiss franc. Things have calmed down slightly although it is far too early to say sentiment has turned positive again.

The escalation of nuclear tensions between the US and North Korea has been the biggest story since last night. Market participants dumped risk-sensitive assets, including stocks, and evidently moved into perceived safe-haven assets including gold, Japanese yen and Swiss franc. Things have calmed down slightly although it is far too early to say sentiment has turned positive again.

Among the major FX pairs hit by the risk-off sentiment, the USD/JPY dropped to its lowest level since mid-June earlier today but it has since bounced off its worst levels. It is worth keeping a close eye on this popular pair, because if it turns lower again then it would point to raised investor anxiety and potentially lead to more panic risk selling later on today or tomorrow. The fact that the USD/JPY has hit a new low on the month relative to other dollar pairs means that if the greenback were to sell-off again then this pair may be the one to look for short opportunities as it is showing relative weakness.

Indeed, the USD/JPY is currently trading below the opening price level of the year, month and week. It is also trading below both of its major moving averages. So the bias is clearly bearish. But so far this year it has been among the most resilient of the dollar pairs as it has fallen the least compared to say the USD/CHF and USD/EUR. So, is it time the USD/JPY started to catch up with the other majors?

The USD/JPY is currently holding its own above a short-term bullish trend line and prior support at 109.90. However if it breaks below today’s earlier low of 109.55 at some stage today or tomorrow then this could trigger a wave of technical selling.  In this case, some of the bearish objectives to watch out for next include 108.85, 108.15 and then 106.85/95 area, with the latter being an old resistance level and the 61.8% Fibonacci retracement against the August 2016 low.

However, the short term bias would turn bullish for the USD/JPY in the event that it breaks and holds above the last resistance area around 111.00. In this potential scenario, we would drop our bearish view and then concentrate on bullish targets. This is not our base case scenario. 

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