USD/JPY Is Up Against The Wall - 110.50-20 Support Under Threat
US stock markets are deep in the red at present and as long as Gold is falling, then we can assume US Treasury buying continues and USD support follows. However, should risk aversion set off further losses on the major US equity indices, then the support we see for USD/JPY is likely to be tested. We have managed to push higher - albeit with a struggle - amid ongoing resilience in the stock markets, however with all 3 of the S&P, Dow and NASDAQ down by over 1%, it is going to be a nervous session ahead for longs here.
Adding to the pressure is the flattening of the yield curve. This is where the 2yr and 10yr bond yields converge, and in the past, this has suggested that longer end rates are coming lower as the market sees a US economic downturn sooner than previously believed. The spread is now back at 24bps which is the recent low, and in the past, this has weighed on the USD and USD/JPY especially, though Treasury buying somewhat distorts the flow signals in the market.
Should the 2yr vs 10yr spread tighten even more, we expect more pressure on USD/JPY, which is setting new lows on the day just above 110.50. As in the title, the support seen stretches down to 110.20, and we suspect there will be stops below 110.00 also, though technically, 109.90 is the level to watch for, for this.
The USD index is also having a tough time pushing for 97.00, and USD sellers are likely coming in at the lows around 1.1300 in EUR/USD as this is one of the lead USD plays. Under 1.1300 we note strong support. Even so, unless the market can push back above 1.1330-35 initially, downside levels will remain a target for NY traders later on today.
For now, focus is on USD/JPY, with EUR/JPY also now back at the lows and is looking to push through 125.00. Next meaningful support here is not until just under 123.00. For USD/JPY, a breach of 109.90 could see 108.00 revisited.