USD/JPY Forecast: A big move is brewing as volatility hits 11-year low

A Bollinger Band "squeeze", seen in the monthly chart, tells me the USD/JPY pair is setting up for a massive move.

Monthly chart

As of writing, the gap or the spread between the Bollinger Bands (standard deviation of +2,-2 on the 20-day moving average) is 0.084 - the lowest since July 2007, representing volatility squeeze of Bollinger Band "squeeze".

Moreover, we are operating in a low volatility environment for more than a year, as indicated by the relentless tightening (fall in Bollinger Bandwidth) of the Bollinger Bands since end 2016. And hence, a big move could be in the offing as an extended period of low volatility is often followed by a sharp spike in volatility.

Forecasting the breakout

History shows the volatility tends to drop ahead of a big sell-off in the USD/JPY pair.

For instance,  Bollinger Bandwidth had dropped to lows near 0.08 prior in July 2007, ahead of the great financial crisis and the sharp drop in the USD/JPY pair from 123 to 100.00 (Feb/Mar 2008).

Also, volatility, as represented by Bollinger Bands, had dropped to 0.084 in July 1984 and the subsequent pick up in the volatility was accompanied by a 4-year long bear market that saw USD/JPY drop from highs above 263 to lows near 125.

It is worth noting that volatility, as represented by Bollinger Bands, had dropped to extremely low levels in July on both occasions, as is the case today.

Going by historical data, I am tempted to say the "squeeze" will end with a big move to the downside. The US-China trade war has just begun and the situation could take a turn for the worse. So, risk assets and USD/JPY could be living on a borrowed time.

However, Fed-BOJ monetary policy divergence favors the USD bulls and the probability of squeeze ending in a bullish breakout would rise sharply if the pair convincingly clears the 2015-2018 downtrend line, currently located at 111.55.