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  • USD/JPY has been consolidating the vicious cycle of supply from as high as 114.55 that has formed in a spiral of offers since Oct. 3rd down to a low of 112.82 when the pair broke below the key support line of the 23.6% Fibo.
  • The pair dropped below the pivot and came into the 38.2% zone, 112.97, with sell stop slippage occurring to mark the aforementioned low.  

The price has since accumulated here with lower lows and a higher corrective high to 113.39. The bulls have some work to do if they are to convince with a break above R1 located at 113.77. Such an achievement will be a tall order considering we are in a climate of poor risk appetite.  

Just recently,  as already well telegraphed, the IMF cut its global growth forecast from 3.9% to 3.7%, noting the ongoing trade tensions. Earlier today, Trump was reported saying that the Chinese are not ready to come to the negotiating table – “Not ready to make a deal”, where his exact words. However, White House CEA Chair, Hassett, said that he sees a lot of progress with Europe on trade. But trade is just the half of it.  

Eyes on China’s ‘CSI 300 Index’

While there is a big focus on Italy and Brexit, the European banking, it is emerging markets and China risk that should be considered as  like a time bomb. The Hang Seng is already at multi-year lows and the recent 4.3% sell-off in the China 300 was a three Z-score event.  We also have USD/CNH in the troublesome territory for EM-FX, even while the Chinese authorities have been cutting Reserve Ratio Requirement’s by 100 basis points –  yet, still, the CNH is on the floor – A telling sign that sentiment in the market is not about to change and that should be Yen bullish on Japanese repatriation flows alone. Eyes are also on the CSI 300 index.   3,200 as a floor – Another break there as we saw in mid-late Sep, but with a subsequent follow through, (often takes a few attempts for key levels to break), all hell could break loose in global equities and that could also spell trouble for USD/JPY bulls. However, with respect to EMs, the dollar shortfall had been something that was giving the greenback a boost, so without the support of a synchronised growth pact on a global macro basis, then the dollar may still shine once the yen repatriation flows dry up and once it  has found a fair value with respect to the economic divergence between the US and Japanese growth story. Indeed,  the US/JP spread will likely come back to the fore in favour of the dollar.  

US CPI, US yields and DXY in focus

Indeed, the focus will be on the US CPI data this week as well as US fixed income. We have a very large  $230b in paper being auction this week alone – Such supply could elevate US yields even higher. However,   there has been a decoupling  between the DXY and US yields of late. What bulls want to see is the DXY break that key 96.240 Fibonacci level, a 76.4 percent retrace of the 96.991 to 93.808 (August to September) decline. Depending on the outcome of the US CPI this week, should the dollar fail to play catch up with yields and be unable to cross over this critical level, USD/JPY bears could well have their cake and eat it, for now, with an unwinding of an overcrowded dollar speculative long position.  

Analysts at Nomura noted the key US CPI this week offered a preview (Key event for the week: US CPI – Nomura):

Key Quotes:

“CPI (Thursday): We forecast 0.2% (0.244%) m-o-m increase in core CPI inflation for September following a 0.082% advance in August. On a 12-month change basis, our forecast would be equivalent to 2.304% advance in September, up slightly from a 2.190% pace in August. The relative softness in core CPI inflation in August was mostly concentrated certain volatile core goods prices.”

USD/JPY levels

  • Support levels: 112.80 112.50 112.20
  • Resistance levels: 113.40 113.75 114.10

Valeria Bednarik, Chief Analyst at FXStreet, explained that the pair has spent the day hovering around a mild-bullish 100 SMA in its 4 hours chart, losing ground below it in the American afternoon:

“Technical indicators resume their declines well into negative territory following a correction of oversold conditions, in line with further declines, particularly on a break below Monday’s low at 112.81, with scope then to  extend its decline down to 112.00/20.”