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Prepare for a Breakdown

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Prepare for a Breakdown

Tension in Ukraine, have pushed the USDJPY to the brink of a breakdown, and traders should be at the ready to pull the trigger on a close below support. This weekend will go a long way in expressing whether the USDJPY will hold, and this should have a spillover effect to the rest of the capital markets. This weekend’s referendum if voted yes, combined with a technical breakdown could be very negative for the USD/JPY.

The Japanese yen is the strongest currency against the dollar this week, gaining about 1.6%. The climb in the yen is a function of risk aversion and has not gone lost on Asian equity bourses. The Nikkei tumbled 6.2% this week with more a little more than half coming on Friday which as more than a 3% decline.

There were 2 important releases in the US that had a small effect on the trajectory of the USD/JPY. The first was producer prices which printed at -0.01% month over month compared to the 0.2% expected by economists. The lack of inflation at the producer level is not as concerning as if it were at the consumer level, but a decline is not welcome by the Federal Reserve.

The second was the release of sentiment by the University of Michigan. The index reading was 79.9, down from 81.6 in February and 82.5 in December. Its most recent high was 85.1 in July. The weaker level, combined with the surprise 0.1% drop in producer prices for February may both be at least partly weather related.

chart-prepare-breakdown.png

The technical picture is setting up as a trade signal where the USDJPY could tumble to support near 98 on a close below 100.75. The MACD is poised to generate a buy signal, where the RSI is moving lower and printing near 39 which is on the lower end of the neutral range. The RSI closing below support at 37, which also be an ominous sign for USD/JPY.

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