USD/JPY in focus as stocks turn volatile, ahead of key US data

Investors’ focus will turn away from U.S. politics and towards economics as we head into the second half of this week. Key employment and wages data will be released this week in the form of ADP private-sector payrolls data (today), official non-farm employment report and average hourly earnings index (both on Friday). If these macro pointers suggest that the world’s largest economy remains on track to end the year on a positive note, then the dollar could finally find some good support at a time when there is also some progress on the tax reform bill. Otherwise, the downtrend could resume especially against stronger currencies, such as the Canadian dollar or the euro. The dollar’s best chance of a revival is against currencies where the central bank is still dovish, such as the Japanese yen. The yen has actually been firmer of late owing to its status as a safe haven asset, as a result of a pullback in the stock markets, especially in the technology sector. But it may be too premature to call this the start of a stock market correction as the major U.S. indices still remain very close to their record high levels. Thus, if sentiment in the stock markets turns positive, then the U.S. dollar/Japanese yen (USD/JPY) currency pair could be the one to watch for a potentially sharp recovery.

USD/JPY testing key short-term support
After again defending the key 114.35-114.75 resistance range in early November, the USD/JPY went on to close the month lower, breaking its two-month winning streak. The long-term downward-sloping trend line, which has been in place since summer 2015, therefore held again. But I continue to expect the trend line to break down at some point because of fundamental reasons: as the disparity between the Fed and BoJ’s monetary policies continue to grow, the USD/JPY should, in theory, push higher. As such, I would be interested in looking for signs of support around key technical levels. In this regard, the weekly chart of the USD/JPY actually looks quite bullish, as things stand. After all, the previous downswings both in September and November ended at previous key support levels, with the price also creating false breakdown patterns, which are reversal signs. But the USD/JPY does need a break in the market structure before we and the trend turned decidedly bullish. So, we will remain patient and see if that key 114.35-114.75 area eventually breaks. Still, we will look for support at the key zone to hold. In this regard, the 112.10 is very important as it roughly marks last week’s close when price formed a green weekly candle above the 21-period exponential moving average. If we don’t see a quick rebound here then my bullish idea is probably wrong. Still, I would only drop my view in the event price breaks below the next support at 111.00.