Japanese Yen Technical Forecast: Bearish
- JPY weakness showed in a big way after the FOMC rate decision.
- If rates are edging higher elsewhere, that could bring on more Yen-weakness, similar to what showed in Q1 of this year.
- Yen-strength could become a dominant theme again should risk aversion rear its ugly head, and with the ongoing situation around Evergrande, it appears that there’s a situation that could create that scenario.
It was a big week for Yen-weakness and given the way that the week had started, few probably would’ve expected matters to pan out that way.
Risk aversion was the name of the game on Monday as fears around the ongoing situation at Evergrande were causing markets to tighten up: Stocks sold off on the Monday open and Yen strength remained a very visible theme. EUR/JPY pushed down to support at the August low, creating a double bottom formation in the process. But prices cauterized support on Wednesday around the FOMC rate decision and when markets opened in Asia for Thursday morning, a strong risk-on move showed that drove equity prices higher while bringing Yen weakness back into the equation.
At this point, it appears that the Yen is somewhat correlated with global macro themes, thanks in part to the Federal Reserve’s dot plot matrix. With the Fed moving up their timeline for possible rate hikes and with the world positioning in advance of that potential move, the Yen could remain in focus for weakness potential, very similar to how Q1 of this year played out. In Q1, US rates were rising in hope that the economy may be nearing full recovery mode.
The Fed hasn’t yet made any moves, and the rise of the delta variant certainly did not help. But when this theme was running loudly in Q1 the Yen remained very weak as it became a viable vehicle for carry trades. Might we be on the cusp of a similar move?
And on the other side of the matter, as we’ve seen repeatedly in years past, risk-off market themes can create a strong move of Yen-strength as those carry trades unwind. With the Evergrande situation continuing to develop, that would be a risk to Yen-weakness themes and equities, as well.
USD/JPY tested a significant resistance level in June at 111.61 but, since then, congestion has been the name of the game. A tightening range over the past couple of months led to this week’s strong topside move, keeping the door open for another test of resistance at the 111.61 level.
USD/JPY Weekly Price Chart
EUR/JPY Bounce from Double Bottom
The week started with fear in EUR/JPY as the pair pushed down for a test of its current seven-month-low, right around the same price that held the lows in August. This created a double bottom formation in the pair and that keeps the door open for potential bearish breakouts if sellers can push back down to that price at 127.92. The neckline of the formation is at 130.74, creating around 282 pips of range between the two prices, so if a breakdown does take place, the bearish trend could be significant.
There is some bullish appeal here, however, as a long-term trendline has been helping to carve out the lows over the past couple of months, as seen on the monthly chart of EUR/JPY below.
EUR/JPY Monthly Chart
GBP/JPY Bullish Breakout Potential
This week also brought a rate decision out of the Bank of England and similar to the Fed, the BoE sounded pretty hawkish. Rates markets are now expecting the BoE to begin raising rates before the US, with focus on Q1 of next year. As noted above on EUR/JPY, this could create a more compelling case for Yen-weakness scenarios in GBP/JPY versus EUR/JPY.
The monthly chart below has some similarity with the above EUR/JPY given the past few months showing a continued grasp for support.
The price around 148.50 appears important, as this is confluent between a couple of 23.6% Fibonacci retracements, taken from major moves spanning 2007-2011 and 2020-2021.
GBP/JPY Monthly Price Chart
— Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX