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USD/JPY Rate Forecast:  Knock, Knock, Knocking on Key 108-Level

USD/JPY Rate Forecast: Knock, Knock, Knocking on Key 108-Level

2018-04-16 21:45:00
Tyler Yell, CMT, Currency Strategist
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USD/JPY Rate Forecast Talking Points:

  • USD/JPY Price Forecast: Break > 108 would negate immediate JPY bullishness vs. USD
  • New Japanese fiscal year could encourage renewed capital outflows weakening JPY
  • USD/JPY Rate Insight from IG UK: changes in retail sentiment favors price declines

A key benefit of FX is that the valuation of any currency is relative. In other words, a weak currency can rise if bought against an even weaker currency. Such a scenario may be the fate of a weak USD rising against a weaker Japanese Yen as a fiscal new year in Japan could engage renewed capital outflows from Japan and weaken the JPY.

Lack of FX Volatility May Give Time for Risk to Perform, Yen to Weaken

Investors appear to be keeping calm and carrying on with their buying of risky assets while selling havens. When looking at FX markets, the Swiss Franc and Japanese are two of the weakest G10 currencies despite geopolitical tensions heating up.

The Deutsche Bank Currency Volatility Index (CVIX) is similar to the CBOE VIX as it measures the implied volatility of currency markets, and makes it a measure of the market’s expectation of future currency moves. The index is calculated on the 3m implied volatilies of 9 major currency pairs such as EURUSD (37.8%), USDJPY (18.9%), GBPUSD (12.1%), AUDUSD (8.1%), USDCAD (6.7%), USDCHF (5.4%), EURJPY (4.05%), EURGBP (4.05%), EURCHF (2.7%).

Falling DB CVIX Fails To Inspire JPY Buyers (USDJPY Lower)

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Source: Bloomberg, Deutsche Bank

Options Insight Also Makes It Tough To Bet Big on JPY Gains

Looking to the options markets, investors have become less bullish on the yen and franc when looking at 1-month risk-reversals, which shows how much of a premium option traders are willing to pay to protect against outsized JPY or CHF gains.

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Data source: Bloomberg

USD/JPY Rate Forecast Looks to 108 Resistance For Broad Bias

An outright bullish view on USD/JPY is still locked away, but a break above 108 would be an immediate bullish development for traders to watch.

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Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

Looking to the four-hour chart above, the price is holding above the cloud (albiet, price is in the cloud on the Daily chart), but still holding below pattern resistance at 108.

Despite the mounting bearish fundamental evidence on the US Dollar Index (DXY), a close above the February 27 high at 107.68 looks likely and such a development could help trigger a short-covering rally.

The broader bearish view would resume on a break below the April opening range low at 105.65 that aligns closely with the daily Tenkan-Sen (26-day midpoint) at 106.06 as key support. Should the price close below these levels, it would be difficult to argue that the trend is not continuing lower and could soon press towards the long-term Fibonacci target of 104.20.

Unlock our Q2 forecast to learn what will drive trends for the Japanese Yen and the US Dollar!

USD/JPY Insight from IG UK Client Positioning

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Source: IG CLIENT SENTIMENT, data provided by IG

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDJPY prices may continue to fall. Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USDJPY trading bias.

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

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