USD/JPY: Primed up for more selling, or can global stocks hold out?

• USD/JPY has been consolidating the recovery from the Tuesday Asian sell-off from the highs of 112.88 that met demand down at 111.95. 
• USD/JPY bulls are back in play but perhaps only momentarily if stock markets continue to their reversals of 2018 gains. 

USD/JPY was two-way traffic overnight between the Europeans and Americans. The pair was initially in supply due to the risk-off environment set by Chinese stocks once again and the contagion slipping its way through the biohazard zones to the European markets. However, it wasn't until the North Americans got involved before there was a biohazard-zone crime scene 'clean up' in the stock markets at least - (The DJIA was off 550 points at one point but ended back to the 200-D SMA and only down by a fifth of the day's losses).

• Wall Street closes in red despite a late rebound

Meanwhile, USD/JPY had made a low of 111.95, ( 55-DMA prop), and rallied from there to make a high of 112.47 despite Fed chat from Bostic reaffirming that Fed hikes are on the way which has had a reverse effect on the pair of late as investors fret over higher rates of borrowing. We also had The Wall Street Journal saying “US Manufacturers See Signs of New Risks”, underlining the stronger USD, rising costs due to the tariffs, and slower growth in China. As a result,  US Treasury yields were accelerating their fall from 3.19% to as low as 3.11% in the 10-yr benchmark on Tuesday. 

"Aside from the levels of risk appetite in global markets, the outlook for the JPY may be impacted by the forthcoming BoJ policy meeting scheduled for October 31," analysts at Rabobank reminded.

Key Quotes:

• "Speculation has been building as to whether the BoJ may offer a policy tweak to support the financial sector.  This could take the form of potentially allowing yields in very long-dated JGBs to rise a little further."
• "It its semi-annual financial system report released this week, the BoJ appears to have signalled that it is comfortable with the lending behaviour of the sector even though many continue to lose money on loans."
• "In July, the BoJ allowed a wider range of movement in yields though it adhered to its huge QQE programme."
• "Any further tweaks could influence the outlook for the JPY, though we expect that in the coming weeks the overall tone of risk appetite in US equities is likely to have a greater influence on USD/JPY."
• "We expect the currency pair to end the year close to the USD/JPY 113 level based on our assumption of broad-based strength has further to run."

USD/JPY levels

• Support levels: 112.60 112.20 111.90. 
• Resistance levels: 113.00 113.45 113.80.

Valeria Bednarik, Chief Analyst at FXStreet, explained that the pair recovered some ground in the US afternoon but still holds below the short-term ascendant channel coming from 111.62, with the trend-line that draws the base of the figure at around 112.40 for this Wednesday. 

"In the 4 hours chart, the price is well below its 100 and 200 SMA, with the shortest gaining downward traction above the larger one, as technical indicators stabilize in negative levels, keeping the risk leaned to the downside. A break below 111.60, however, is still needed for the pair to accelerate its decline, with scope then to reach 110.37, September low."