Nikkei 225 Slides 3% as Yields Spike; USD/JPY Reverses Lower

Nikkei down ~3% as Japanese yields surge
Yen firms, signalling carry unwind
Nikkei nearing key 48,500 support
USD/JPY pivoting around 155.05 for direction

Summary

Whether you want to pin it on the escalating spat with China over Taiwan, concerns over the fiscal outlook amid speculation about another sizeable stimulus package being considered by the new government, or simply the bearish price action seen on Wall Street to begin the week, it’s been a nasty Tuesday session for Japanese markets. The Nikkei is off around 3% as Japanese government bond yields rupture higher across the back end of the curve, as seen in the chart below. Even with the fiscal concerns, the Japanese yen has caught a bid, hinting the rout in risk may be prompting an unwind in carry positions.

Source: TradingView

Nikkei Nears Key Levels

Source: TradingView

You can see the Nikkei 225 contract is quickly closing in on 48,500, a level that acted as both support and resistance earlier this year. That’s the near-term focal point should the rout extend. If it does, it would bring the April uptrend into play, along with the 50-day moving average. The latter was ignored for long periods last year but still needs to be on the radar. If the price were to break those, 47,000 and 45,170 are the next downside levels of note. On the topside, 49,500 previously offered support, so it may flip to resistance should we see a squeeze. 51,500 is a more significant level found above.

The message from RSI (14) and MACD is one of shifting price momentum. The former is now trending lower beneath 50, indicating building downside strength. MACD remains in positive territory but has already crossed the signal line from above, producing a warning for bulls that directional risks may be turning lower.

Carry Trade Unwinds Underpin Yen?

Source: TradingView

Despite concerns about Japan’s fiscal outlook given moves in long bond yields, USD/JPY has reversed its earlier gains that saw it briefly trade at levels not seen since February, leaving it marginally below the highs struck last week. Price action around 155.05 may prove instructive on where directional risks lie as we enter the European session, providing a level where setups could be built around.

Should the unwind extend further, shorts could be set beneath 155.05 with a stop above. The October uptrend, 153.60 or 153.00 screen as potential targets. Given the coiling wedge pattern the price finds itself trading in, a break of wedge support may encourage other bears to join the move, potentially seeking a return to the October lows.

Alternatively, should USD/JPY push back above 155.05, the option would be there to initiate longs with a stop beneath for protection, targeting either the session highs, uptrend resistance or 156.50 resistance.

Momentum indicators continue to deliver bullish signals, with RSI (14) and MACD flatlining well above neutral territory. Topside strength isn’t building, but it’s not weakening either, favouring bullish setups. However, given elevated risk aversion, more emphasis should be placed on price action rather than retention of a set directional bias.

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