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USD/JPY Technical Analysis: Will a Weekly Head & Shoulders Doom Abe?

USD/JPY Technical Analysis: Will a Weekly Head & Shoulders Doom Abe?

Tyler Yell, CMT, Currency Strategist


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Talking Points:

  • USD/JPY Technical Strategy: August Support Favors Buying the USD/JPY Dip
  • Channel Support & RSI Oversold Reading Makes Selling a Difficult Move
  • Seasonal Tendencies Favor USD Strength for January, Which Could Support USD/JPY

When the Yen strengthens as it has at the beginning of 2016, there is often stress in the global economy. So far, the JPY has strengthened by ~2.5% to start the year vs. the US Dollar while most currencies, most notably the commodity currencies have weakened aggressively. USD-JPY is in a precarious position much like the global economy is in a precarious position. Many expect a rally in risk, even if it is just a short-lived rally because we have been trained like Pavlov’s dog to expect a bounce when risk-aversion takes over in equities & JPY. However, the Fed is done easing, and is, in fact, tightening, and the truth about China is that we do not know how bad things are over there with certainty.

An important word of note, USD-JPY has shown a propensity to triangulate. For shorter-term traders who are keen on daily targets and invalidation levels, this may be no problem. However, for swing traders and multi-month triangle pattern can be frustrating and worth avoiding or turning to a shorter-term trading plan. Should a triangle be playing out again, support should hold at the August 24 low of 116.07 while the upside up towards the 61.8% retracement of the November-January range near 121.75.

Short-Term Bullish USDJPY Scenario If Channel Low Holds

Adding to the uncertainty surrounding risk sentiment and the USDJPY, a rather ominous pattern is developing on the Weekly Chart. The bearish Head & Shoulders Reversal Pattern seems to be forming as the price is breaking below the long-term price channel drawn from the 2012 extremes. If price breaks below the August 24 low, the Bearish Head & Shoulder’s has price targets in the 110 zone. If that happens, the price should remain below 120.35, the December 14 low if we are going to see an impulsive decline.

As a word of caution for traders, if the head & shoulders play out, we could start to hear from the BoJ in a way we did not in 2015 that will add to the JPY volatility. Throughout last year, they remained rather confident in their ability to provide support through a weak JPY for the Japanese economy thanks in part to Abenomics. However, the fickle global recovery would be in doubt if excessive JPY strength came on the scene. If this should develop, buying JPY against most currencies and especially the weaker currencies would likely become the play-du-jour.

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Long-Term Bearish USDJPY Head & Shoulders

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.