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Fundamental Analysis

Yen Safety Demand Prompts Key USD/JPY Breakdown

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Though the US dollar was relatively flat on Thursday, USD/JPY made a key breakdown below a confluence of price support as a result of sustained demand for the safe-haven Japanese yen amid rising tensions and saber-rattling between North Korea and the US.

With US President Donald Trump and North Korea's Kim Jong-un trading increasingly brazen threats against each other, markets across the globe found the intensifying conflict difficult to ignore. Asian and European equity markets fell sharply on Thursday, and US stocks made a relatively rare plunge, with the S&P 500 dropping by more than 1%, the Dow falling over 170 points at one time during the trading session, and the Nasdaq exceeding a 1.5% drop.

The continued flight to safety on Thursday could be readily seen in the price of gold and the Japanese yen, both of which surged as investors abandoned riskier assets in favor of those perceived as safer. The current stalemate between North Korea and the US may not be resolved so easily, even if it is highly unlikely that North Korea would actually follow-through on its threat and jeopardize its own regime by attacking the US territory of Guam. With no ready solution to the current tensions, markets are likely to continue experiencing heightened volatility, and safe-haven assets should continue to be in demand, at least in the short-term.

Amid heavily increased yen demand, USD/JPY broke down below a confluence of support that includes the key 110.00 psychological support level and an uptrend line extending back to the April lows that also represents the bottom of a large triangle consolidation pattern. With further safe-haven yen demand, USD/JPY could follow-through on this breakdown to target the next major support level to the downside at the 108.00 level. Any continued break below 108.00 would constitute a significantly bearish technical event for the currency pair, which could lead to further downside towards the 105.50 support area.

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