USDJPY Traders Should Watch the S&P500

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Published: Aug 31, 2017, 09:43 GMT+00:00

The USDJPY had a strong bounce off the 108.00 level this week and the reaction has sparked a lot of interest in the pair.

The USDJPY had a strong bounce from 108, what to keep an eye on now

The USDJPY had a strong bounce off the 108.00 level this week and the reaction has sparked a lot of interest in the pair. As you can imagine, bonds have dropped and yields moved up adding to the tailwind of the USDJPY rally (not pictured here).

USD/JPY Weekly Chart

I’m in the camp that the USDJPY continues higher near term, but we are in a longer term triangle at the moment, so upside may be limited to the 113.50/114.00 range as we hit the longer term downtrend line and range highs.

However, to assist managing risk, I am also focused on the SPX, since the USDJPY and SPX have had a strong correlation over the years. What you will notice is the last year, the SPX has pushed higher without the USDJPY, but the day to day correlations are still fairly strong.

USD/JPY vs SPX Weekly Chart

The SPX has been grinding higher up a trend line all of 2017, as you can see below. But what is glaringly obvious is the RSI is very divergent and not following the price higher:

SPX Daily Chart

In the next chart, we look at the weekly SPX and what is highlighted are the fall months (boxed) for the last several years. Typically, the fall is not the best time for the equity markets, but seasonality kicks in around the November time frame that allows for a move higher through the Christmas holidays (also known as the Santa Claus rally). Since we have been in a prolonged uptrend, the last few years have been more receptive to the fall pullback (last 5 out of 6 years) and considering we find ourselves back at all time highs, this year is at risk of following the same pattern.

SPX Weekly Chart

If trading the long side of the USDJPY, I think it makes sense to follow the SPX as well, to manage downside risk. If the SPX breaks the 2420 level, and especially the 2400 level, the USDJPY will probably be trading closer to 108.00 than 110.00. But as long as the SPX continues to push higher, the 113.50/114.00 level looks likely to be tested once again.

This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.