USDJPY eyes further downside with structural breakdown

THE USDJPY currency pair has been a strong performer in 2023, having risen from a low of 127.22 in January to a 13-month peak at 151.90 in November. This marked a whopping 19.4 per cent appreciation of the US dollar against the Japanese yen from trough to peak. Subsequently, the pair retraced sharply to as low as 141.6 on Dec 7, before rebounding to hover around 142 at the time of writing on Dec 14. We hold the view that the USDJPY is bound for further downside, due to a few technical observations.

The USDJPY pair staged a structural breakdown from a large rising channel that stretched back to December 2022. The rising channel is formed by two parallel, upward-sloping support and resistance trend lines that have contained the price movement for almost a year. A breakdown from the lower support band, which the USDJPY had tested but was unable to breach on several occasions throughout the year, signalled a significant shift and violation of the previous uptrend.

Furthermore, the bearish crossover of the 20-day exponential moving average (EMA) below the 50-day EMA at the beginning of December also marked another clear sign of a bearish trend reversal for the USDJPY. In a downtrend, the shorter-term 20-day EMA tends to be lower than the longer-term 50-day EMA.

Looking at technical indicators, the Relative Strength Index (RSI) validates the bearish momentum of the USDJPY, with the reading breaching below 30. The RSI is a momentum oscillator that suggests overbought conditions when the reading is above 70, while a reading below 30 indicates an oversold condition. In a downtrend, the RSI tends to stay below the neutrality zone of around 50. On Dec 14, the RSI slipped below the oversold territory of 30. As long as the RSI remains below 50, the trend remains bearish for the USDJPY and we expect further decline in the pair.

While the general trend favours the USDJPY bears, we foresee a short-term rebound to retest the resistance zone at around 143.50 (R1) before the pair retreats to our downside target zone at around 141.55 (S1) and 140.42 (S2). In the event where prices breach below S2, the USDJPY will be bound for another pivotal support zone at around 138.70 (S3).

The writer is strategist at Phillip Nova