The US dollar has started to sell-off against the Japanese yen currency as fears over contagion from the Chinese Evergrande debt default situation caused the risk sensitive USDJPY pair to plunge.
Stocks have stabilized somewhat today, however, some news reports suggest that developments around troubled Chinese property development Evergrande have actually worsened, while some commentators are more positive.
Reports over the weekend stating that senior executives bailing out of their shares prior hit sentiment on Monday. China’s second largest property developer was seeking to settle its debts using unsold apartments, liabilities growing.
Chinese markets open with less losses than feared, and the PBOC also offered its most support since January. This has stopped the rot somewhat as Hong Kong’s open and Evergrande shares there were pummelled lower yesterday and moved down over 10% to extend losses.
Some of the ‘contagion’ in seemingly unrelated assets is selling to fund margin calls in more troubled areas. A relief rally of sorts is currently underway, with ING Bank maybe some bold calls.
ING Bank economists expect that a government restructuring of Evergrande will happen to help the firm raise capital, and that the company may have to sell stakes to 3rd parties. This would be bullish for riskier asset classes, hence why we need to keep a close watch on the USDJPY pair.
According to the ActivTrader Market Sentiment tool some 84% of traders are bullish towards the USDJPY pair, which may hint those further losses are coming as positive sentiment is rising while the price falls.
This is a bearish constrain signal which is pointing to more USDJPY losses, and we should also consider that the fundamentals are all uncertain and we have other risk events such as the FOMC meeting and the US debt ceiling.
USDJPY Short-Term Technical Analysis
Technical analysis on the four-hour time frame shows that the USDJPY pair is now starting to trade towards the neckline of a large head and shoulders pattern. However, it is still a close call whether a breakdown takes hold or not.
According to the overall size of the head and shoulders pattern the USDJPY pair could be preparing to drop by some 200 points in the short-term, taking the USDJPY back towards the 106.50.
USDJPY Medium-Term Technical Analysis
The daily time frame is showing that the USDJPY pair is trapped inside a large falling price channel. These patterns are typically considered to be bearish reversal patterns.
Should we see the USDJPY pair fall under the channel then a further increase selling pressure is likely, and we could see accelerated technical selling towards the 108.40 to 107.00 price area.
If we bounce from current levels then the USDJPY pair is likely to bounce towards the 112.00 area. Overall, the fundamentals will drive the technicals, and in particular the mentioned risk events this week.