Japanese yen favoured as bitcoin triggers bout of risk off

Market Summary:

I had thought that the ISM services index would take the lead for market action, yet Bitcoin had other ideas. The classic-flavoured crypto market momentarily reached a record high before doing a sharp reversal lower then proceeded to fall nearly 15% over the next three hours. Bitcoin is now flat for the week and on track for a a doji, although the risk of volatility around prior cycle highs was noted last week – so if history is anything to go by, we may have just entered a period of elevated volatility and shakeouts

Wall Street indices gapped lower and sent the S&P 500 and Nasdaq to a 4-day low, the Dow Jones fell to a 2-week low
The Japanese yen was the go-to safe-haven of choice for forex traders, rising across all of its FX major peers and sending USD/JPY below 149
The Canadian dollar lost the most ground against the yen, with CAD/JPY looking like it may want to break beneath Thursday’s low and below 110
Gold also faltered at its highs and pulled back from its intraday record high, yet remain on track to close to a record weekly high
Tokyo’s inflation came in hotter than expected, which raises the prospect of if a BOJ hike sooner than later and supports a higher yen thesis
Super Tuesday has kicked off in the US where former-President Trump aims to knock his main rival – Nikki Haley – out of the running for the Republican nominee. Whilst Trump cannot technically win outright with the 15 States voting today, he could win by a far enough margin to bolster his chances going forward
ISM services PMI revealed further weakness in the US economy, with the headline index and prices paid expanding at a softer pace and employment contracting.
The US dollar index closed lower for a third day, although it remains above its 200-day EMA heading towards a key testimony from Jerome Powell on Wednesday to the House Committee

Events in focus (AEDT):

09:00 – Australian construction, manufacturing indices (AIG)
11:30 - Australian GDP capex, final consumption
18:00 – German exports
01:15 – US ADP employment
01:45 – BOC interest rate decision, rate statement
02:00 – Fed Powell testifies to the House Committee
02:00 – US JOLTS job openings, small business optimism, wholesale inventories
02:00 – Canada PMI (Ivey)
02:30 – BOC press conference

USD/JPY technical analysis

I have been quite vocal about a potential bearish reversal on USD/JPY in recent weeks, given the extreme bearish positioning on Japanese yen futures and more recently hawkish comments from a BOJ member, If US data continues to soften, the case for a lower USD/JPY builds. Especially if this weekly bearish reversal on USD/CNH continues to play out.

A 2-bar bearish reversal formed on USD/JPY following its bearish outside day on Tuesday, which might form part of a lower high within the ‘fade zone’ I mentioned last week. Bears could seek shorts within Tuesday’s range with a stop above this week’s high (or the 151 handle for a more conservative approach). This is anticipation of a move to and below the 149.20 low.

Of course, an upside risk for the pair is if Jerome Powell delivers a hawkish speech during his testimony to the House committee, and Bitcoin bulls come back in force despite the ugly shakeout at its record high.

CAD/JPY technical analysis:

If I had to short a yen pair today, my preference would be CAD/JPY. It was the weakest major-yen pair on Tuesday, but the cross has also broken trend support and printed a 3-bar bearish reversal pattern (evening star formation). And if the BOC add a dovish tone to today’s meeting, it could send CAD/JPY below 110.

A 100% projection of the initial leg lower lands around 109.30, and the 109 handle sits near a 38.2% Fibonacci retracement level – both of which seem viable downside targets for bears.

View the full economic calendar

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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