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USD/JPY Jumps above 3 Yr Trendline, 112 on Strong US Inflation Data

USD/JPY Jumps above 3 Yr Trendline, 112 on Strong US Inflation Data

2018-07-11 20:00:00
Tyler Yell, CMT, Currency Strategist
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USD/JPY Rate Forecast Talking Points:

  • The ONE Thing: USD/JPY has broken out of a consolidating move, which could pave the way higher for more gains as fear appears to be absent in the market. Trade war developments are not hurting business sentiment, and USD strength appears to be a theme re-emerging.
  • Options premium over the coming month for USD/¥ shows fear is receding alongside the willingness to pay a premium to protect against outsized ¥ strength.
  • USDJPY jumping 1% can be seen through Ichimoku as trend resumption. The consolidation since May all took place above the Ichimoku cloud, which argues that uptrend continuation is now in play.
  • Trade wars have been in the news. If you’re not familiar with trade wars and their history,We've got you covered

KEY TECHNICAL LEVELS FOR JAPANESE YEN RATE TO US DOLLAR:

Overall Bias: Bullish above the Ichimoku Cloud

Resistance: ¥114.20 per USD, November closing high

Spot: ¥112.00 per USD

Support: ¥110.82 9-day midpoint

US PPI Shows Inflation Is Quickening

Despite persistent media fears about a trade war being the death of the global economy, spot and option trades around USD/JPY are seeing blue (or green) skis ahead. The Yen, typically a barometer of risk sentiment and seen as a bit of a haven asset, continues to weaken and fell to the lowest levels against the USD on Wednesday since early January.

In alignment with a higher spot USDJPY was the US Treasury 2-year yields. The US PPI final figures showed the highest demand since 2011.

See what we see when looking at the Japanese Yen. Check out our new Q3 Yen Forecast here.

USDJPY Put Premiums Dissipate As Spot Rises

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Source: Bloomberg

The chart above shows the ratio of premiums paid over the coming month for out of the money USDJPY calls to out of the money USDJPY puts. A negative number, which we’ve seen for all of 2018 means a put premium is the present reality of the market.

As the put premium increases, the spot price of USDJPY tends to fall as you can see with the blue area and the orange line falling together.

However, the put premium (blue line) has dissipated. As such, spot is rising. If the premium shifts to the calls, it means that traders are not paying a premium to protect against outsized USDJPY strength, which would mean that opportunities on the long side are in favor.

Should The ¥ Weaken If a Trade War Escalates?

FX traders tend to become accustomed to looking at JPY crosses the first time anything seen as negative emerges in the media. Therefore, when news emerged about the initiation of a Trade War as US President Trump began tariffs on China, the initial thought was likely that USD/JPY was going to respond by falling from Trendline resistance.

However, the Japan economy is undoubtedly an export economy. A key part of Abenomics was to encourage inflation through increased business activity that was helped by a weak ¥ though this was not outright stated.

The problem, as outline by Vincent Cignarella of Bloomberg is that the two largest customers of Japan’s goods are the two countries taking the headlines as the key players in the trade war. At the same time, ¥ strength has been absent and likely for good reason. Traders may do well to consider a new theme emerging in the market of persistent ¥ weakness.

USDJPY Chart: The Price Held above Ichimoku, Now Faces Resistance

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Chart Source: IG UK Price Feed. Created by Tyler Yell, CMT

Technically Speaking on USD/JPY:

The chart above shows USD/JPY over the last three years. During that time, we’ve moved persistently lower with a few shocks due to geopolitical developments. However, as US President Trump continues his path forward, it appears that spot FX traders may rely on a different narrative for USDJPY.

In short, you can see the spot price has broken above the 3-yr trendline that began in June 2015. Additionally, since April, USDJPY has traded above the Ichimoku cloud.

The Ichimoku cloud is a complex indicator on the surface, but a rather intuitive technical way to identify trend and momentum on multiple time frames.

Should the spot price continue to trade above the Ichimoku cloud and the 3-yr trendline, traders may want to consider a move toward the November highs around 114.50 if not higher. Only a break and close below the cloud and the rising channel near ¥ 109 per USD would argue for a false break of the trendline.

New to Ichimoku? Click here for a free guide if you’d like to learn more

More For Your Trading:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q3 have a section for each major currency, and we also offer an excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a surplus of helpful trading tools, indicators, and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions.

Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities, and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

---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.

Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.

Discuss this market with Tyler in the live webinar, FX Closing Bell, Weekdays Monday-Thursday at 3 pm ET.

Talk markets on twitter @ForexYell

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

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