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USD/JPY Rate Forecast:  Yen In The Crosshairs As Risk Off Accelerates

USD/JPY Rate Forecast: Yen In The Crosshairs As Risk Off Accelerates

2018-02-08 17:30:00
Tyler Yell, CMT, Currency Strategist
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USD/JPY Rate Forecast Talking Points:

  • USD/JPY Price Forecast: fundamental and technical forces favor more selling
  • Japan’s Current Account surplus and volatility open-up JPY to haven status/ repatriation flow
  • USD/JPY Rate Insight from IG UK: rise in retail long positions favors MT USD/JPY downside

Currency traders are always looking for the next shoe to drop. The recent rise in volatility that began on February 2 and has yet to die down opens up the possibility of rather significant in strength or the coming weeks.

Collision of market forces favor buying JPY

A trader could point to a myriad of reasons why the will JPY could continue to strengthen. First, the spike in volatility historically favors a strong yen. Heightened implied volatility simply suggest that uncertainty is rising, which favors the massive flow of institutional money from Japan closing out of riskier investments in other currencies and converting those back into JPY. This process is known as repatriation and can happen fast.

Another fundamental force that favors haven status in Japan is their 2017 current-account surplus hitting the whitest level since the global financial crisis ten years ago. A widening current account surplus simply shows that the economy is selling more goods or exports and they are buying or imports. It was a key tenet of Abenomics and helps to show the health of the economy.

When capital flows around the world looking for the safest home, economies with current account surpluses, like Japan, tend to be attractive as a haven.

USD/JPY Rate Forecast Looks to Ichimoku for Downside Bias to 108 or Lower

USD/JPY Rate Forecast:  Yen In The Crosshairs As Risk Off Accelerates

Source: IG Platform. Chart created by Tyler Yell, CMT. Tweet @ForexYell for comments, questions

On the price chart with the Ichimoku Cloud technical study applied, traders can see that price has broken below chart support. With Ichimoku, there is a bearish signal confirmed when the lagging line (bright green) breaks below the cloud alongside price. The cloud base is near 112.30, but looking to the future Kumo (cloud), traders can see conviction if building to favor further downside. The future kumo can act as future resistance and should give a bearish bias as opposed to a price forecast.

Unfamilair with the dynamic Ichimoku Indicator? Fix that here

Another signal can be taken from looking at the prior breakdowns in USD/JPY when the lagging line broke below the cloud alongside price. In early- and mid-2017, the breakdowns of USD/JPY below the Ichimoku cloud brought a move of 4% and 3.5% respectively. A similar move to the two witnessed in 2017 would see USD/JPY likely break toward the 2017 low of 107.40 or lower. However, if volatility per the CBOE SPX Volatility Index remains above 20 (at 27.68 at time of writing), it’s easy to say that the JPY strengthening to 107 would likely be too weak of a JPY bullish forecast, and we could see a move in the 100-105 range by month’s end.

Unlock our Q1 forecast to learn what will drive trends for the Japanese Yen and the US Dollar by year-end!

The resistance of USD/JPY can be taken from the top of the Ichimoku Cloud at 112.00. The spot rate is 109.10 or 290 pips away from the spot is the level that my trading bias would shift from bearish to neutral. A shift to bullish would require another 95-pip gain to 113.75, the December high.

USD/JPY Insight from IG UK Client Positioning

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We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDJPY prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current USDJPY price trend may soon reverse higher despite the fact traders remain net-long.

Discuss this market and other things you're watching and trading with me below!

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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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

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