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USD/JPY: bears lining up for a test below trend line support and the 21-D SMA

Currently, USD/JPY is trading at 106.60, up 0.17% on the day, having posted a daily high at 107.31 and low at 106.25.

The greenback is slipping further to the downside and that leaves the descending trend line vulnerable to a close lower than 106.50 today. However, the yen is also weak and opened down 0.8% from Monday’s close today. The CPI data already took USD/JPY down from the aforementioned highs and this level that is now under pressure is a key area of support, 106/40/60.

What’s happening to the outlook for the greenback?

The CPI data was not an upside surprise and hence the sell-off in the greenback, down -0.31% on the day so far in the DXY where the 10yr yields are now -0.44% at the time of writing. CPI showed headline consumer prices rising at an annualized 2.2% during February and 0.2% inter-month, but, taking out food and energy costs, CPI only rose 1.8% year/on year and by just 0.2% on a monthly basis vs 0.3% prior. Thus, this is where the markets have started to discount a fourth or even a third rate hike in 2018 when coupled to the disappointment in the nonfarm payrolls wages data last Friday.

Other considerations? 

There has been increased focus on the global short position in the dollar and concerns over the banking sector:

DXY underwater on nonfarm payrolls, but, watch the Libor/ OIS spread:

There is a warning signal out there that warns that the banking sector is in trouble, known as the Libor/OIS spread. The spread has moved out to the widest since 2012, (it broke above its 6-year range on Friday, when the USD Libor-OIS spread jumped 2bps, rising to 44.23bps), and investors are looking to the European banking sector again.  Casting minds back to 2012, this was the widest this key spread has been since January of that year when the latest European sovereign debt crisis was in play and when the Fed had to open unlimited swap lines with the rest of the world to avoid a global dollar funding crisis.

Such focus is likely dollar supportive, as explained in the above ‘linked’ article, however, an additional weight on the greenback, are the OECD economic projections that were revised upwards. The pace of expansion over the 2018-19 period is expected to be faster than in 2017, (but tensions are appearing that could threaten strong and sustainable medium-term growth. The UK is expected to see the slowest growth rate among G20 in 2018/2019).

Eyes are now set on this week’s retail sales and a disappointment there could spell real danger for the short term dollar bulls and open up the 105 handle.

Locally, Monday’s scandal-driven gains have been completely retraced and JPY is testing fresh two week lows at levels last seen in late February. “Spreads are steady and the broader tone continues to dominate as risk reversals hint to an ongoing erosion in the premium for protection against JPY strength vs. both the USD and EUR,” analysts at Scotiabank explained. We now await the latest BoJ minutes are scheduled for release at 7:50pm ET.

USD/JPY levels

The price is sitting on the descending channel’s resistance meeting the 21-D SMA 106.65 but the Bulls need to get through JPY107.20 to break this upper end of the range near JPY108.  

On the wide, 110.85 is key ahead of and 111.44/50 as being a double Fibonacci retracement that is lining up with a lower and descending 200-D SMA at 111.30. For the downside, a break of 106.20 opens 105.89 and then 104.80 opens up territory with little chart support towards 100.70/99.00 on the charts.

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