As overall market risk from the Doha debacle appeared to fade on Monday, yen strength eased somewhat, prompting USD/JPY to bounce once again from its major support level at 108.00. Since the first full week of the month, when the currency pair plunged down to the pivotal 108.00 level, it has attempted to break down but has been repeatedly thwarted by the strength of that support.
Despite the failure to reach an output freeze deal among major oil-producing countries on Sunday, and a resulting plummet in oil prices, crude oil pared most of those losses by the end of trading on Monday and global equity markets similarly rallied. This reduced safe-haven flows to the yen, providing a small amount of respite for the seemingly relentless strengthening of the Japanese currency in recent weeks and months. With the yen’s moderate retreat on Monday, USD/JPY was able to lift off 108.00 support once again after having come dangerously close to a breakdown.
Although the recently surging yen (and falling USD/JPY) has raised speculation that the Bank of Japan may at some point intervene to weaken its currency, skepticism remains over the effectiveness of the central bank’s attempts to do so, especially in light of its recent easing into negative interest rate territory, which had no lasting impact on restraining yen appreciation.
Since the beginning of February, the Japanese yen has generally surged sharply against the dollar, pressuring USD/JPY below successively lower support levels, including the key 116.00 and 111.00 levels, followed by the 110.00 psychological level, and finally hitting its major downside support target at 108.00 in early April. In the process, the currency pair established a new 17-month low slightly below 108.00 just last week.
In the event of a resumption of yen strength with the added catalyst of dollar weakness, and in the absence of a successful attempt by the Bank of Japan to intervene, a sustained breakdown below the 108.00 level could soon begin to target the next major downside objective at the 105.00 support level.