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Global stocks have stolen the show and send USD/JPY back to 111.63

  • USD/JPY has been making tracks to the downside following a sharp correction in global stock prices that has supported the yen.
  • USD/JPY has formed a bullish flag following the correction of yesterday's wild ride on Wall Street and a break of 111.00/20, initiated on month-end flows perhaps, could attract bids for a breakout back to the upside. 

USD/JPY has been tracking the gyrations of the stock markets in thin holiday trade whereby US stocks on Wednesday rallied hard following Mastercard's data that was showing that sales during the holiday season rose the most in six years in 2018. Kevin Hassett, chairman of the White House Council of Economic Advisers, also affirmed that Fed chairman Jerome Powell's job was '100% safe'.

There were also reports on Wednesday that a US government delegation is going to travel to Beijing in the week of 7th January to hold trade talks with Chinese officials. This all has lead to the eighteenth biggest single-day gain in the US index since 1970 (a total sample of nearly 12,800 trading days) as investors picked up oversold prices in thin holiday trade. 

US futures sparked European stock rout and sent the yen flying high

However, the tone has switched over on Thursday with stocks in European markets plummeting and Wall Street on the back foot. The European market's bullish gap was met with heavy supply as US futures plummeted. Traders clearly remain concerned about the trade dispute between China and the US and a global economic slowdown. A Reuters report that President Donald Trump is considering an executive order to ban US companies from using equipment built by China's Huawei and ZTE sparked up jitters once again and traders were quick to take profits in thin holiday trade. On UK soil, the downside moves were exaggerated after a survey of company directors from the Institute of Directors did little to boost sentiment. The survey shows that business confidence in the British economy has declined to the lowest level since the EU referendum. The FTSE plummeted from 6762 to 6536 and the DAX from 10707 to 10278 making for a bid on the yen which is now trading as low as 110.60/70 from highs within the 111.40's.

USD/JPY levels

  • Support levels: 110.40 110.15 109.80
  • Resistance levels: 111.05 111.40 111.75

Valeria Bednarik, Chief Analyst at FXStreet explained that the "short-term picture for the pair is bearish, given that, in the 4 hours chart, it is developing far below bearish 100 and 200 SMA while technical indicators faltered around their midlines, now heading lower within negative levels." Valeria added that further declines expose the multi-month low reached this week at 110.13, with further slides possible on a break below the 110.00 figure.

Bullish flag in development

However, on the possible end of year dollar repatriation flows, given how soft global equities are, the dollar could attract a year-end bid which would validate the recently formed bullish flag on a break of the 111.00/20 area. 

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