- The USD/JPY fell below the closely-watched ¥105.00 level and trades at the lowest since November 2016.
- Worries about trade dominate, but they are not alone in pushing the pair lower.
- The technical picture is bearish but the pair may be stretched.
Four reasons for the collapse of the USD/JPY
1) US-Chinese trade issues: The Trump Administration announced plans to impose tariffs on Chinese goods and also sanction the world’s second-largest economy on Intellectual Property. The estimated size of the underlying products is around $50-60 billion, and China was quick to respond, albeit with tariffs limited to approximately $3 billion. The Japanese yen is a safe-haven currency that gains in times of trouble and the sharp losses in stock markets indicate these are times of crisis.
2) No exemption for Japan on metals: The previous tariffs by the Trump Administration on steel and aluminum came into effect. Many countries received an exception but not Japan. This is another source of worry.
3) A hawk as National Security Adviser: Trump also announced the replacement of H.R. McMaster with John Bolton as National Security Adviser. This latest reshuffle puts a hawk that supported the Iraq war at a top-level position. The US approach towards North Korea could harden adding to the safe-haven flows.
4) US rate hike: The Fed raised the interest rates to a maximum of 1.75% as widely expected and is set to continue increasing rates later on. Jerome Powell and his colleagues did not raise the projection for hikes in the dot-plot for 2018 and were disappointed by the slow rise in wages. On trade, Powell mentioned that businesses had voiced concern. If things continue deteriorating, the Fed may slow down the pace of hikes and this could hurt the US Dollar.
USD/JPY Technical Analysis – Stretched
The RSI is very close to 30, still indicating further falls but nearing oversold territory. Momentum is still significant to the downside.
The new low of ¥104.63 is the next line of support. Below, the next lines are from late 2016. ¥103.12 and ¥102.10 are next.
On the upside, the recent lows turn into resistance: ¥105.25 and ¥105.55. Higher above, the weekly high at ¥106.60 is next.