Yen firms amid stock market sell off

With the U.S. dollar mixed against other major currencies but modestly down overall on Monday, USD/JPY dropped below the 120.00 level once again as the Japanese yen strengthened amid plunging stock markets.

U.S. and European stock markets dropped precipitously on Monday in the face of increased uncertainty surrounding global economic growth. The yen rallied in response to this market volatility, as it attracted safe haven asset flows.

USD/JPY has been consolidating within a tightening triangle chart pattern for the past month since the partial recovery from late August’s plummet. Throughout the course of this consolidation, the currency pair has fluctuated almost methodically above and below the noted 120.00 price area and, for the most part, below both its 50-day and 200-day moving averages.

At the same time, the 50-day average has progressively begun to converge with the 200-day average. This type of close convergence has not taken place in well over a year, and could be a signal of continued downside risk for USD/JPY. In the event of an actual cross of the 50-day moving average below the 200-day, a “death cross” will have occurred, which could presage a potential bearish trend change.

Before this would potentially occur, however, the short-term bearish trigger to watch for would be a continued drop below 120.00 and a subsequent breakdown below the noted triangle consolidation pattern. Further stock market volatility would likely be the catalyst for such a drop.

In the event of this breakdown, the next major downside target for USD/JPY should be at the 118.00 support level, followed further to the downside by the key 115.50 support objective.