USD/JPY: Finally poised for a breakout?

For USD/JPY traders, it’s been a particularly trying two and a half months. Since late August, the pair has carved out a tight 300-pip range between 118.50 and 121.50, never closing beyond this zone despite central bank decisions on both sides of the Pacific, a series of disappointing US jobs reports, and a raft of other economic data. Already today, traders have received the latest readings on the US labor market from ADP (+182k jobs in October, in-line with the 183k jobs expected) and ISM Non-Manufacturing PMI (59.1, better than the 56.6 reading anticipated).

As we’ve noted before, volatility tends to be cyclical, so periods of high volatility often follow periods of subdued price movement. USD/JPY traders have gone from excitement with the pair’s volatility, to patiently waiting for a breakout, to outright apathy and disgust with the low volatility as we go to press. While we can appreciate readers’ skepticism, the extended period low volatility suggests we could see a breakout and more volatility in the near future.

Typically, when a market is trapped between a support and resistance level, it will ricochet between the top of the range and the bottom of the range (indeed, this is the ideal environment for using overbought/oversold oscillators like Stochastics and RSI). USD/JPY had been following this script reliably until the last two weeks, when rates have been consolidating right at the top of the range around 121.00. While it’s by no means foolproof, the pair’s resilience at the top of the range suggests that buyers are eagerly stepping in to support the pair on any short-term dips and foreshadows a possible bullish breakout.

If we do see such a breakout emerge, perhaps on the back of a solid Non-Farm Payroll report on Friday, USD/JPY could quickly rally back toward its previous resistance in the 124.00-1.2500 zone as traders increase bets that the Federal Reserve will hike interest rates in December. Of course, a disappointing report could still take the wind out of bulls’ sails and condemn the pair to more consolidation within the 300-pip range, so readers should always watch to see whether the price action is confirming their thesis.

Being a successful trader takes constant vigilance, and with many traders turning their attention elsewhere, USD/JPY could finally be poised for a major breakout that many will miss.