With two weeks left to election, Moody’s rating agency has cut down Japan’s rating from Aa3 to A1. The decision was made due to raising concerns over Japan’s ability to service its debt following Shinzo Abe’s decision to postpone sales tax increase.
Fundamentally this will keep the already weak Yen even weaker, while we agree with the fundamental views, I feel the need to point out some cautionary observation, especially in EUR/JPY and GBP/JPY.
EUR/JPY Outlook
The pair’s movement has been very volatile in the past two weeks and should be a concern to most bulls out there. The momentum to the upside have been significantly reduced and there is a concern that the pair could be in for a quick correction before the 2014 Japanese election taking place on the 14th of December.
Not only has the pair pushed higher and rejected at 200% Fibonacci Extension on the daily chart, it also find itself confounded by ranges in the market. Most notably 148.00 -149.00 acting as a resistance and 147.00 – 146.00 as a support in the past two weeks. This leads to the formation of a symmetrical triangle at the top of the trend, signalling a period of consolidation and a potential for a much deeper correction in the market should those support levels give way.
While symmetrical triangle are neutral by nature, the formation shows a loss of upside momentum in EUR/JPY. This week will be critical for the pair as it needs to push and close above 149.00 for it to be able to maintain the push higher. Our concern is that the opposite could occur with the pair closing below the support trendline and potentially below 147.00.
Should this be the case then 146.00 (also in line with the current 23.6% fibonacci retracement) will act as an immediate support. A break below however will trigger a much deeper correction with a potential of pushing price back at least towards 38.2% Fibonacci retracement level around 144.00.
We have two potential trade scenario for this, the first is a buy if there is a daily close above 148.00 with target at 149.00, the second is a sell should it break below 147.00 for an initial target of 146.00.
The first trade is in line with the current sentiment in the market for a weaker Japanese Yen, however the potential is limited to 149.00 as momentum wanes.
The second scenario is a counter trend, but it is supported by the technical view that a correction in the market is necessary for the pair to maintain the current run to the upside.
Ultimately we prefer to be a follower than a contrarian in this decision and prefer to wait for a break outside of the current triangle before taking on a side.
Chart courtesy of Invast cTrader
GBP/JPY outlook
GBP is currently the stronger currency compared to EURO and GBP/JPY still shows signs of potential gain to the upside, potentially until 188.75 close to where the 161.8% Fibonacci extension is located. Unlike the EUR/JPY the pair is not yet in an overbought state, technically still supporting the current push higher.
One concern that I have is the formation of a rising wedge on the Daily chart, this usually indicates a potential reversal of trend and with the pair in extension and this could be the first sign of a technical correction about to happen.
Unlike the twin scenario in EUR/JPY, GBP/JPY is still on track for further gains to the upside, for as long as the support trendline of the wedge holds. Readers that are already long in GBP/JPY should still maintain the position for a potential exit at 187.50, 188.00 and 188.50, keeping an eye on the support trendline.
Readers that have no position yet, please be patient. A break below the support trendline would indicate a potential correction and long position holders are better off closing their position and new traders can take the break as a sign to trade the correction.In addition a close below 80 on Daily Stochastics Oscillator is also necessary to confirm the overbought nature of GBP/JPY should there be a break below, the parameters used in my analysis are (14, 5, and 5). I suggest readers to use whatever indicator you are familiar with to detect overbought/oversold condition.
Due to the uncertainty on when this correction could occur, it is hard to determine how far down it will correct itself. However, previous support and resistances could provide us with a good indication on how far the correction could go.
We noted 184.50 as the immediate support for the pair, followed by 181.00 where the previous swing high was located. This levels are ideal as a target should the correction occur.
Chart courtesy of Invast cTrader
In Summary
As I mentioned at the beginning fundamentally we see the weaker yen being supported by Japan’s rating downgrade. My only concern with the current market euphoria is that most traders forget that the currency market is a fickle one in a highly volatile environment. I have no qualms in weaker Yen as there are more benefits behind a weaker yen, however we must not blind ourselves with the bullishness and ignore potential signs of corrections in the market. While these are considered to be a normal correction the gain in the Japanese Yen crosses over the past few months makes something small very significant in terms of range.
These are our initial impressions only, please make sure you read all disclaimers on this website carefully. If you have any questions, please contact the Invast staff for more details.
Contributing author:
Vito Henjoto
Technical Analyst
@vhenjoto