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Japanese Yen Chart May Be a Warning Sign for the Nikkei

November 16
15:06 2019

Japanese YEn, Nikkei225 – Talking Points:

  • Japanese Yen, Nikkei 225 have tracked higher amid improving market sentiment
  • US-China trade deal hopes, ebbing no-deal Brexit worries lifting traders’ mood
  • USD/JPY break of chart support may be warning of an anti-risk shift under way

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Japan’s benchmark Nikkei 225 stock index rose alongside the hawkish turn in priced-in 2020 Fed policy expectations. The USD/JPY exchange rate advanced in lockstep, reflecting a parallel drop in the anti-risk Yen. The move appears to reflect hopes for de-escalation of the US-China trade war and easing worries about a no-deal Brexit. The US central bank concurred at its October policy meeting.

Chart of Nikkei 225 stock index, USD/JPY exchange range, Fed policy expectations

Chart created with TradingView

A red flag has now been raised by an eye-catching USD/JPY chart support break. Prices closed below a rising trend line establishing the upswing from August lows, which doubled as the lower bound of a bearish Rising Wedge pattern. It seems especially telling that this followed on the heels of a test at 13-month resistance. Negative RSI divergence added still more credence to the downside argument.

US Dollar vs Japanese Yen price chart

Daily USD/JPY chart created with TradingView

For its part, the Nikkei 225 has narrowly managed to hold up at the support line guiding its near-term trend. Sellers are pressuring this boundary however, pushing the index to within a hair of breakdown. The move in USD/JPY need not guarantee the same fate for Japanese stocks – correlation emphatically does notimply causation. Still, one asset may certainly mark an end to a common narrative before another.

Chart of Japan's Nikkei 225 stock index

Daily Nikkei 225 chart created with TradingView

If the Yen’s seemingly brightening prospects portend a broader recovery in anti-risk demand, Japanese stocks may soon follow USD/JPY downward. A daily close below trend line support – now at 22939 – initially targets 22505. The 21825-22120 zone follows shortly thereafter. Immediate resistance is at 23660, with a daily close above that needed to neutralize the near-term bearish threat.

USD/JPY, NIKKEI 225 TRADING RESOURCES

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— Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter

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