It was another day of market mayhem in China, where the benchmark Shanghai Composite fell by more than 6%. Unlike some of the other panic episodes we’ve seen so far in 2016 though, the volatility was contained to China, with major European indices seeing only minimal moves and oil, everyone’s favorite indicator of investor sentiment, hovering around the key 30.00 level.
Lost amidst the intense focus on the day-to-day fluctuations in oil however, is analysis of the traditional gauge of investor risk appetite: USD/JPY. Much like the major US indices, USD/JPY has found a floor at key previous support, in its case in the 116.00 zone. Last week, the pair carved out a big Bullish Engulfing Candle* from that support level, signaling an intraweek shift from selling to buying pressure and hinting at the potential for more strength this week.
So far, bulls haven’t been able to create much upside momentum, but even the roughly-unchanged performance since the beginning of the week is impressive given the steep drop in US and Asian equities. Before we would feel confident saying any sort of medium-term bottom has formed, we would need to see the weekly RSI indicator break out of its established bearish channel, which would signal an end to the full year of increasing bearish momentum.
In case you hadn’t had a chance to look ahead on the economic calendar, USD/JPY will be buffeted by two big central bank announcements later this week. The US Federal Reserve will issue its latest monetary policy statement tomorrow at 14:00 ET (19:00 GMT), though no major changes are likely (stay tuned for our full FOMC preview later this afternoon).
Then on Friday, the Bank of Japan will meet to decide whether to further increase its QQE program or to hold off for another month. Overnight, a number of Japanese officials including Economy Minister Amari, Finance Minister Aso, and Prime Minister Abe all issued comments essentially implying that the BOJ should not increase its stimulus yet, but it remains to be seen whether this veiled "advice" is followed or merely misdirection for traders. Either way, volatility is likely to pick up in USD/JPY over the rest of the week, and a surprise easing from the BOJ could cause USD/JPY to spike quickly toward 120.00.
* A Bullish Engulfing candle is formed when the candle breaks below the low of the previous time period before buyers step in and push rates up to close above the high of the previous time period. It indicates that the buyers have wrested control of the market from the sellers.
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