JPY crosses/Technical Analysis/USD/JPY

USD/JPY: Technical analysis

Courtesy of Chifbaw.com:

What is happening with the Yen?

Analysis: 

The USD/JPY has been very active in the past few days. On one side, the breakout to the downside in the US 10 year yields has pushed the USD/JPY back towards 79.05. On the other side, the collapse of the Japanese government, and the new elections are giving hopes to the USD/JPY bulls that the impotent BOJ would lose its independence and start massively printing Yen to combat deflation and Yen strength, and the pair has rallied heavily back above 80.00.

Technically speaking the first breakout that occurred two weeks ago did not succeed and the market reverted from 80.60 to 79.05. However, this time around the breakout is much stronger:

  • A clear move above the weekly trend line resistance, with a likely weekly close above it.
  • A breakout of the 50% Fibonacci retrace at 80.60 (top 84.x, bottom 77.x)
  • Bullish engulfing at the weekly level (in formation).
  • The price is above the 100-DMA, 150-DMA, 200-DMA, 100 weeks moving average.

In addition, as shown on the chart below, our long term sentiment indicator suggests that the market is turning on a weekly basis bullish on USD/JPY. This indicator tries to measure the amount of bulls in the market. The critical area is 50% (0.5). When the market crosses 50%, it is usually an area of trend formation. The last time we crossed 50% was in March of this year, but the price was not able to break above the trend line resistance and we fell back below 50%. This time around the move above the 50% is much stronger and has chances to be more sustained. It could be that we are witnessing the reversal in USD/JPY that will lead it above 100, but we don’t believe this can happen without a break down in the JGBs (a push above 2% on the 10Y for instance, currently sits at 0.74%).  The Japanese bond market is still quiet.

If at the end of this week, we close above 80.60, then we believe that we are in for a new leg up in USD/JPY for at least a few weeks with a first target in between 83 and 84. Elections and changes to the status of the BOJ will take time to be implemented. Therefore, we should not get too excited by today’s breakout and upside movement will most probably remain slow. In our view there is a high probability that we reach 81.50 (38.2% retrace) next week. The low risk reward approach here is to look for dips to enter long again.  Also, given the upside potential in EUR/USD, the EUR/JPY could be the best vehicle to profit from this weakness in the yen.

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