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Chinese Stock Market Plunges, Giving the Yen a Boost

The Chinese equity market has been plunging since peaking in June. According to the Financial Times, the Shanghai Composite Index has fallen more than 40% since that peak in June.

(click to enlarge; source: Financial Times)

This has the making of a bubble burst and some hard times ahead for the markets to adjust. Amid this storm of risk aversion, the Japanese Yen has been getting a boost, and is rallying sharply to end this week. Let's take a look at the USD/JPY.

USD/JPY 4H Chart 7/3

(click to enlarge)

As we can see in the 4H chart, USDJPY has been sliding since the beginning of June. But even though the JPY is getting a lift as a safe-haven currency, especially for Asian markets, the pair's decline appears to be in a corrective structure. 

Still, this correction is showing signs of extending. We are closing he week with price retreating from the "pennant" resistance around 123.75. After a bearish engulfing candle, price continued to slide and has at least the 122.00 handle in sight, with risk of taking the correction correction further lower. 

USD/JPY Daily Chart 7/3(click to enlarge)

Looking at the daily chart, we can see that if price falls below 122.00, the next key level will be around 120.84, a previous resistance pivot, and where the 100-day SMA resides. A more aggressive bearish outlook has the 120.00 handle in sight, where price will likely be challenged by the 2015-rising-trendline.

Monitor the RSI around 40 as well. If price can hold above 120, and the daily rSI can hold above 40, the medium-term bullish outlook would still be intact. But for now, we should anticipate further bearish correction attempts in the short-term.