The Japanese Yen has been the strongest G10 performer this year, and the recent surge of Yen demand suggests there could be more gains ahead.
Volatility for Yen pairs exploded yesterday and sent anything priced against it broadly lower. Carry trades and commodity currencies were particularly hard hit (a classic sign of investor angst), yet it was GBP/JPY which took the title as the biggest loser among FX peers. With Sterling coming under renewed Brexit pressure, it stood little chance against the surging Yen to tumble a further 1.6%.
As mentioned by Jamie Dutta, the safe-haven status of the Japanese Yen can make it a harbinger of doom. And with investors simultaneously fleeing stocks, bonds and rushing into gold, it certainly feels like doom is nigh.
The renewed fear that the Fed may be serious about 4 hikes this year has jolted equity and bond markets, which have previously thrived under a low rate environment. And if the Fed tightens, it increases the likelihood that central banks will follow in lock-step. It, therefore, doesn’t surprise too much that Yen reacted violently when BOJ reduced their 25-year JGB purchases by 13% yesterday and Kuroda’s merely mentioned ‘very gradual’ normalization further out. As BOJ’s policy has kept the Yen weaker, any perception other than a loose policy can strengthen the Yen in a flash.
But on a global scale, nerves seem high. As Warren Buffet famously said “only when the tide is out do you discover who’s been swimming naked” and market moves this year suggest some people are. As global markets have binged on cheap credit at record low rates, for a record amount of time, it’s easier to understand how they’d get a little jittery when the punch bowl is removed and face the prospect of paying real interest on loans. And that’s before we consider leveraged accounts, fully invested in markets at record low rates. We’re not even out of the first quarter in 2018, but it looks like the stage is set for another turbulent year, and the Japanese Yen has thus far remained supreme. With that in mind, we look at the potential for USD/JPY to extend its decline.
Will USD/JPY be the next shoe to drop?
USD/JPY only depreciated by 0.6% yesterday after Powell’s hawkish testimony handed the USD renewed strength. Yet while it looks relatively unscathed compared with commodity FX, the larger picture doesn’t bode too well for the bull-camp, judging from the weekly structure.
Bears have remained firmly in charge since the January high, and the apparent ease it crashed through 107.32 support and the 2012 bullish trendline only underscores their strength. And as we outlined in our recent video, a break of the 2013 high (105.44) could expose Trump’s ‘election speech low’ at 101.18, as there are no obvious levels of support in between.
The daily trend structure is firmly bearish although price action is coiling between 105.53 support and a 50% retracement level. RSI has since moved up from oversold, and price action no longer appears over-extended. So, the key here is to seek a low volatility entrance in line with bearish momentum.
With any luck, excitement over the Yen will subside and allow the coiling price action to converge within a tighter range, and increase the potential reward to risk ratio with a 105.53 target in mind.
However, as compelling as the bearish trend and lust for Yen currently seems, it would be wise to remember that the sentiment which currently favours JPY can turn on investors just as quickly. Therefore we would opt to put USD/JPY on the back-burner if bearish momentum returns but, until such a scenario, we’ll continue to seek a suitable short entry.