For much of the second half of last year the Nikkei 225 and USD/JPY moved in the same direction. However, this relationship has deteriorated since the start of this year, as both the Nikkei and USD/JPY have traded in a range. The Nikkei has lagged other major global indices, but now may be the time for it to play catch up, which could have big implications for USD/JPY.
The Nikkei has followed US indices higher this week, as US indices including the Dow 30 and the S&P 500 made fresh record highs. If this continues, and the relationship with USD/JPY makes a comeback, then this important G10 FX pair could follow suit.
The technical view:
USD/JPY is testing a critical resistance level at 102.39, the 50-day sma. The latest strength in this pair has seen momentum cross higher, which is a bullish sign, and if we can clear the 50-day sma then there is scope to test resistance at 103.06 – the 61.8% retracement of the April sell off. Above here opens the way to 104.13 – the high from April 4th and then 104.92 – the January 16th high.
Strong support lies at 101.20 – the low from March 3rd, which has prompted a rebound twice since then, and looks like a medium-term low for this pair.
Takeaway:
- Global stocks are starting to rally, which could boost the Nikkei.
- Strength in the Nikkei could boost USD/JPY.
- USD/JPY looks strong in its own right; if it can get above 103.06 resistance then we could re-test the highs of the year so far.
- On the downside, 101.20 looks like a medium-term low for this pair.
