USDJPY – A dip and a rally in the making

For long term investors, the USDJPY's recent volatility shouldn't be much of a surprise. For most of 2015, the Yen was trading within a range, between 125.8 and 120.5. The rather flat move in a currency pair distinctly known for its strong volatile moves must have served as an early warning. The Fed's plans to hike rates in December of 2015 was well communicated and expected, so much that the move was rather nicely priced in and in hindsight, the 2015 rally to 125.8 might have been just that. After the Fed's hike, the US Dollar however failed to rally any further on account of the anticipated policy move. By late December, the Yen was already showing signs of strengthening as the equity markets started to wobble.


                                        USDJPY – 2015 Market Moves

In early January, USDJPY fell to lows of 116.2 as the global economic conditions started to deteriorate further. Fuelled by low Oil prices which put pressure on inflation, slowing demand from China with weak manufacturing, the Yen evidently became a safe haven bet, which further rallied as the Fed's January meeting turned out to be more dovish than expected. However, the BoJ managed to form a floor by cutting interest rates to the negative in hopes to weaken the Yen. While the USDJPY did indeed manage to rally, 121 was the top that was formed with the currency pair falling sharply thereafter. What came later is now anybody’s guess. So what’s in store for the USDJPY over the next 10 months? We think that the Yen is likely to strengthen further but in the longer term horizon, the short term weakness is likely to be a mere blip than anything else.

USDJPY – Monthly Technical Chart

In order to get a better idea of the price action in USDJPY, we need take a step back and look into the longer term horizon. The first chart below shows the USDJPY monthly timeframe. We summarize the following points of observations.


                                    USDJPY – Monthly Technical Overview

• The breakout from 92.5 in 2013 saw a strong marked move to the upside
• The price rally was capped near 125 – 120 region, followed by a minor head and shoulders pattern
• The breakdown of the neckline has taken the USDJPY to 115 region
• We expect to see a pullback to 120 over the next couple of weeks to establish resistance and pave way for a move to the downside
• If resistance at 120 is established, USDJPY could dip strongly down to 104.5 region where a support level is pending to be established
• If price fails to find support at 104.5, a steeper decline could see USDJPY test sub-100 levels to 92.5

USDJPY – What’s in store?

Looking at the same chart above, the levels of 104.5 and 92.5 interestingly mark the 61.8 and 38.2 Fib retracement levels of the rally from 75 – 125.


                 USDJPY – Potential levels to watch (Inverse head and shoulders)

If prices indeed decline lower, the monthly chart for USDJPY marks a potential cup and handle/inverse head and shoulders pattern. Of course, for this to play out to a near text book pattern, we will need to see support coming in at 104.5 levels or at least expect prices to stay above the 100 psychological level.

The unfolding chart pattern projects a possible move to the upside on break of 125 resistance, with 135 marking the 127.2% Fib extension and 151 marking the 161.8% move higher.

While it is still early to tell, watch USDJPY as it gradually dips lower to 104.5 levels, which could mark a right shoulder as well as the handle.