USD/JPY could be sold on strength

It has been a relatively quiet start to the week for the major FX pairs with little change in sentiment from the weekend.  

Japan
Source:Bloomberg

Perhaps the most significant development is the fact USD/JPY has slipped below Friday’s lows, with a new low of 101.26 being printed. The only notable release out of Japan was the industrial production reading which came in slightly below estimates at +0.5%, but still showed an improvement from the previous month.

Recent releases out of Japan have been underwhelming to say the least and we are likely to continue seeing this situation unravel in the near term. Japan’s Tankan report this week is likely to have an impact on how the yen trades this week and warrants caution. It’s also a big week on the US dollar side of the equation with the all-important non-farm payrolls due out. Investors will be hoping to see strong US data which would lift the greenback and ultimately aid a USD/JPY recovery.

The 101.50 level is key

Key support at 101.50 was broken on Friday and has since turned into resistance. This level was retested on Friday and resulted in further selling, with 101.50 capping gains. The next support is at the 101 whole number, but this might not matter if there are no catalysts to trigger a recovery.

Currently the picture looks quite bearish but I would still be against a momentum play. My preference would be to sell the pair on rallies back towards the 101.50 region. This presents the best value and could really pay off if the losses accelerate. Should geopolitical risk ramp up then this could be a source of further yen strength which would also be a negative for the pair.

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