USD/JPY vulnerable to downside risk - Scotiabank

Eric Theoret, Strategist at Scotiabank notes that USD/JPY technicals remain neutral to bearish, with spot forming an ascending wedge, which is typically resolved in a bearish manner.

Key Quotes

“JPY is range-bound, consolidating within an increasingly tight range (while also apparently forming a bearish ascending wedge) with no discernible reaction to the release of softer domestic industrial production data for August. There are no other major domestic releases or events scheduled through the remainder of the week, leaving the focus squarely centered on the broader market tone and the outlook for relative central bank policy.”

“Risk reversals have rebuilt the premium for protection against JPY strength and the 2Y U.S.-Japan yield spread has stalled around 110bpts. The lost of downward momentum for JPY would suggest a shift in the near-term balance of risk. We look to near-term JPY strength.”

“USDJPY short-term technicals: neutral-bearish—bullish momentum signals are stalling and USDJPY appears to be forming an ascending wedge. The patterns are typically resolved in a bearish manner, leaving USDJPY vulnerable to downside risk.”

“Near-term support has been observed around the 9 day MA (103.75) and a break could see weakness to the mid-102s. USDJPY gains also appear to have stalled above 104.20 with considerable resistance at 104.50”.