The USD/JPY is selling off from our 3rd tier downtrend line after the currency pair failed to climb past previous June highs. Encouragingly, the pullback comes on declining volume while lacking the conviction to the downside like that of the EUR/USD. We are not surprised by the USD/JPY’s current weakness, and the tango between the near- term uptrend and medium-term downtrend lives to see another day.

While the USD/JPY has made three consecutive declining highs with multiple downtrend lines bearing down on price, the currency still has two strong uptrend lines to fall back on. Hence, even though the power of the downtrend outweighs that of the uptrend, there is little evidence showing another collapse in the USD/JPY is imminent. We could continue to see the currency pair trade within the range of our 1st tier uptrend line and 5th tier downtrend line as they slowly approach their respective inflection points.

Meanwhile, any further systemic weakness in the global economy should have a corresponding impact on the appreciation of the Dollar. The USD/JPY is reacting to yesterday’s data showing that central banks are slowing their purchases of U. S. paper. Therefore, we suspect the USD/JPY will exhibit a positive correlation with U. S. equities for the foreseeable futures since the fate of the Dollar relies upon the ability of the global economy to stabilize and recover from here. Further deterioration of the global economy could increase the likelihood of the world powers opting to replace the U. S. Dollar as the global standard for monetary pegs and transactions.

Altogether, we maintain our negative outlook trend-wise on the USD/JPY due to the precedence and strength of the downtrend. The currency pair has fallen below our 3rd tier uptrend line again. Keep an eye on our 2nd tier uptrend line. If this support doesn’t, hold we could see the pullback pick up speed. The USD/JPY is currently fighting to stay above April lows, and it is certainly plausible for the currency pair to hop back above our 3rd tier uptrend line should U. S. equities recover.

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