When Will the Japanese Yen be Ready to Fall Again?
Currencies / Japanese Yen Nov 19, 2013 - 05:10 PM GMTBy: Submissions
Adam Lemon writes: The biggest story in Forex over the past 12 months – or to put it another way, the most profitable story in Forex over the past 12 months – was the dramatic weakening in both the JPY and the AUD.
Leaving the AUD to one side and focusing on JPY, which is more liquid and at the heart of the story, the narrative went something like this: Japan is in trouble, facing a future with an ageing, shrinking population and a frightened, unproductive younger generation traumatized by years of stagnation. Constitutionally unwilling to countenance mass immigration, Japan has no choice but to try to inflate away its problems by engineering a dramatic depreciation of its currency.
So far, so good. The political echelon signaled clearly for the first time that the central bank would target devaluation, after which the JPY plummeted, before stabilizing somewhat by the late spring / early summer. Some traders made a lot of money.
The fundamentals are still in place, although the political echelon has indicated it is content with the extent of the move for the time being. Moreover, it is dangerous for any country to devalue too openly. The big question is, how much further does the JPY have to fall, and when is this movement likely to resume in earnest?
We can try to answer this by turning to technical analyses of the JPY against its two largest counterparties by far, the EUR and the USD. Based upon the Bank of Japan’s basket, it can be said that USD/JPY constitutes about 49% of the basket and EUR/JPY a further 36%.
Beginning with the monthly chart of USD/JPY, we can see that after its strong upwards move, the pair has been stuck in a triangle all summer just under a logical resistance point at the swing high of 101.43:
The pair seems poised to continue upwards, and may be breaking bullishly out of its triangle right now. Two things are currently lacking: strong bullish momentum and a significant close above 101.43. When these factors become apparent, a bullish leg all the way up to 110.50 becomes possible. There is no need to pick the time, but we are not far from the start of 2014 nd early January often injects some strong momentum into the market.
The next big move up in USD/JPY needs to happen in conjunction with strong bullishness simultaneously in EUR/JPY. The monthly chart of this cross tells a different story:
Two bullish signs are the facts that the recent candles have not shown the same consolidation as in USD/JPY, and that the 50% Fibonacci retracement of the long-term downwards move has been breached to the upside. The problem is that we are approaching an area that was previously a distributive zone for the EUR, and we are approaching it after an already extended move. This cross can move quickly, but the indication in any case is that the levels around 138.50 to 139.12 are going to prove strong resistance. Ideally it would be good to strongly clear the 61% retracement and 140.00. However once that hurdle is overcome, a level as high as 165.00 can be targeted, with little standing in the way except the EUR’s own capacity to strengthen.
Looking at both the pairs together suggests that the next large drop in the JPY is not going to happen for a few months yet, late spring 2014 at the earliest and quite possibly not until 2015. We will need to clear 140.00 in EUR/JPY and 141.43 in USD/JPY with momentum. Once this happens though, we can target a depreciation of up to 8% in the JPY, which is a prize worth waiting for.
By Adam Lemon, Senior Analyst, DailyForex.com and Chief Instructor at www.fxacademy.com.
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FX Academy is a comprehensive Forex education system conceived directly from the need for traders to learn about Forex trading at their own pace in a comfortable, interactive environment. Founded by the trading experts at DailyForex.com, FX Academy offers traders of all levels the widest range of online courses to increase their knowledge of macro environmental trading conditions, trading concepts and strategies from core to advanced, heighten confidence and ability to trade profitably. For full details visit: http://www.fxacademy.com/
About Adam Lemon
Adam is the Chief Instructor at www.fxacademy.com and trades Forex on his own account. He has worked in financial markets for over 12 years, including 6 years with Merrill Lynch. He is certified in Fund Management and Investment Management by the U.K. Chartered Institute for Securities & Investment.
Copyright © 2013 Adam Lemon - All Rights Reserved
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