Talking Points
-Japanese fiscal stimulus is anticipated to be significantly smaller than expected sending USD/JPY lower
-Prices dropped into previously cited support zones as USD/JPY tries to build a medium term base
-Technical structure remains bullish medium term and a break above 105.42 builds the case a low is in place targeting 111-115
Overnight, Japan’s finance minister stated the government has yet to make a final decision on the size of the recently announced stimulus package. Therefore, traders felt the stimulus coming out of Japan could end up smaller than expected. My colleague Christopher Vecchio says the stimulus program is anticipated to be 6 trillion Yen vs the expected 10 trillion Yen. As a result, the Yen strengthened driving USD/JPY lower.
The technical picture for USD/JPY continues to play out according to the playbook we highlighted on Friday. We were anticipating a sell-off that may turn into a bullish reversal at lower levels. One of the levels identified was 103.90. Today’s low thus far is 103.99. Therefore, it is possible the low is in place.
The key level we’re watching is 105.42. Above here and we have overlap with the July 21 low and the case builds the low is set.
So long as we are below 105.42, we need to consider the possibility of one more dip lower to finish off the 5 waves down from July 20. Support levels to watch are 103.90 and 103.50.
Don’t lose sight of the bigger picture. The medium term technical picture suggests an important low may form nearby that could send prices shooting higher towards 111 and possibly 115. A break above 105.42 shifts the probabilities higher the move is underway.
In looking across other JPY crosses like EUR/JPY, GBP/JPY, and AUD/JPY, they appear to be building medium term bases as well. Therefore, USDJPY or JPY crosses may be an area of focus over the next several days.
Be mindful of market volatility potentially kicking up Wednesday afternoon into Friday morning. First, the FOMC concludes their 2 day meeting Wednesday afternoon. Then, Thursday night into Friday morning the BOJ is expected to present their latest monetary statement. Any surprises out of either camp could create some USDJPY volatility.
Lastly, keep an eye on live trader positioning in USD/JPY. The current SSI reading is +1.65. If this number moves significantly in one direction or the other, it could signal a price move in the opposing direction.
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---Written by Jeremy Wagner, Head Trading Instructor, DailyFX EDU
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