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USD/JPY and the Yen Crosses Offer Technical Intrigue But Fundamentals Tepid

USD/JPY and the Yen Crosses Offer Technical Intrigue But Fundamentals Tepid

2018-02-22 05:00:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Yen crosses have widely eased for weeks, but an equally-weighted index of these pairs has codified it into a clean technical move
  • There are provocative patterns for the likes of USD/JPY, EUR/JPY and CHF/JPY; but these pairs have yet to transition to true trend
  • Seeking out a motivation for true trend is difficult as monetary policy and growth have no chance, and risk has proven uneven

See how retail traders are positioning in USD/JPY, EUR/JPY and other Yen crosses intraday using the DailyFX speculative positioning data on the sentiment page.

USD/JPY Tempt Through Technicals

I - like most traders - am frequently drawn to a market because of the appetizing technical picture it presents first. And, just such a technical appeal has arisen among the Japanese Yen crosses. USD/JPY cleared a multi-year rising trendline support a few weeks ago with 108 as a noteworthy milestone to demark the progress. With the bounce over the past week, technical classicists would note the pattern of former support standing in as new resistance. There is not a certain outcome to this staging, but the potential is sufficiently leveraged. A hold of this new resistance and projection lower would be a traditional continuation - much like the dip buying in other risk oriented assets of previous months and years. A move back above 108 is another outcome that registers a false breakout and reversal back into range.

Daily Chart of USD/JPY

A Look at the Yen Crosses Across the Board

While USD/JPY offers up one of the most recognizable of the technical pictures - and carrying the respect of being one of the most liquid pairs in the FX market - there is a similar cut to the of EUR/JPY, CHF/JPY and Yen crosses et al. Referencing an equally-weighted Yen Index, a rising wedge nearly 18 months in the making produced a bearish break earlier this month. Amongst the other crosses, we have tentative breaks like the EUR/JPY and CHF/JPY. There are also those those charts are less concise but nevertheless registering correction like AUD/JPY and NZD/JPY. Technical staging is important to the trade-ability of this situation at hand as the fundamentals provide an uneven backdrop.

Equally-Weighted Yen Index

What Decides the Reversal or Recovery for the Yen Pairs?

There are a few key fundamental drivers that have been responsible for developing trend and momentum for the Yen crosses over the past years. The problem is that these catalysts are not consistent in their motivation for trend development. Monetary policy for the Japanese Yen has proven itself to be essentially a non-event. Over the past three decades, the Japanese currency has maintained its position as a primary 'funding currency' in carry trade, but a global deflation in rates has flattened the field for the short-side to this traditional income play. Meanwhile more traditional economic features of the landscape like economic health or political pressures are dramatically less important to the likes of Japan. This risk trends as a primary driver. But these theme has proven itself to be uneven both in its very nature and its ability to move this particular currency.

Focus on Risk Trends

If we are to see a trend arise from USD/JPY and its related crosses, we need to see a deeper well of conviction than just a moderate level technical break. Drive is fostered through fundamental stoking that has the capacity to continue to build steam in one direction or the other. Sentiment is all consuming, but it is not always under power. That is the situation we currently find the market in. The slide in risk assets earlier this month helped force the initial break we see in the Yen Index and USD/JPY. Yet, benchmarks like the S&P 500 and Dow have held off from true trends, so it makes sense that the Yen crosses are not running astray. Plotting out scenarios ahead, a return to risk trends is possible; but the sheer exuberence of the past years and the notable deviation between carry and other risk milestones like equities suggests this is a poor outlet for trades. If there is an opportunity to be found, it will be in moderate range swings that don't require an unlikely resurgence in speculative appetite in an overpriced world. For that, I am watching EUR/JPY and CHF/JPY. Those same pairs however have high level technical support in spot's vacinity and would make appealing bearish cases if properly motivated. We lay out the appeal and trading conditions for Yen crosses in today's Quick Take Video.

Rolling 12-Month Performance of Various 'Risk Assets'

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