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We had strongly suspected that volatility was brewing for USD/JPY, but yesterday’s explosive moves surpassed our expectations. With a high-low range spanning nearly 4% it was its most volatile session since November 2016 (when Trump was elected), most of which was achieved within 15 minutes and kicked off with a -1.75% decline in under 60 seconds.

We can see on the daily chart that the suspected Déjà vu played out, although the trajectory of this decline was more severe. Stopping just shy of the March ’18 low, a volatile rebound saw the session close with a wide-ranging hammer candle. Whilst a break above 108.90 confirms it as a bullish hammer, it’s possible we could see daily compression within the hammer range before the next sizable move unfolds. However, as the trend remaining bearish below 111.41, we could consider short setups if bearish momentum was to return following a consolidation period.

Whilst the four-hour chart was heavily overextended relative to its lower Keltner band, mean reversion is now underway. The 20-period average may provide an area of resistance, but we’d also expect prices to consolidate as we head towards today’s NFP report. 

With the trend remaining bearish whilst 109.46, short setups are preferred. Volatility has subsided during its retracement to make way for a potential for a bearish wedge which, if successful could target the 106.75 area. If data disappoints and Powell makes dovish remarks during his panel interview today, we could see USD/JPY turn lower in line with bearish momentum. Yet for us to consider bullish setups we’d need to see a clear break of 109.46 followed by a consolidation phase at the very least. 

Matthew Simpson CFTe,Senior Market Analyst (Asia)