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USD/JPY: When Clear Technicals Just Aren't Enough

USD/JPY: When Clear Technicals Just Aren't Enough

John Kicklighter, Chief Strategist

Talking Points:

  • The equity-based VIX exploded through the first quarter as extreme inactivity led to a normalization to the same extreme extent
  • While there was some measure or activity pick up in FX markets, the disparity in itensity and consistency to VIX has been profound
  • Key catalysts such as political risks are good for black-and-white readings of risk-reward, but more complicated for FX

What do the DailyFX Analysts expect from the Dollar and Japanese Yen through the 2Q 2018? Download forecasts for these assets and more with technical and fundamental insight from the DailyFX Trading Guides page.

The Technical Shot Heard Across the FX Market

There is little missing the technical clarity that USD/JPY offered Monday. The progression the pair has developed through 2018 looks as if it has followed a textbook for chart patterns. First, we had the significant, single-direction move in the pair's slide throught e first quarter of the year. An approximate 900 pip slide is difficult to miss particularly when it generates so much speculation around the state of risk trends and the health of the the Dollar. From there, consolidation started to form with a weeks' long range. There is a little slop to the extremely technical standing of an inverse head-and-shoulders pattern, but it is difficult to miss the transition from isolated lower lows to higher lows. It was truly the 'neckline' break that cemented the weight of the turn this past session. This is exactly the progression we'd expect to see with a turn with the definitiveness on the break that speculators rarely see. Yet, there are serious limitations we should consider.

USD/JPY: When Clear Technicals Just Aren't Enough

Liquidity and the Confluence of Analysis Techniques

For many, technical analysis is the only qualifier necessary before taking a trade. However, there are certain limitations when it comes to divining the charts. First, it is important to state that I don't believe technicals reflect the subconcious of the masses - whether that be the influence heavenly bodies exert on our gravity or a mass psychology that conveniently shows up on graphs. I see them more as a self-fulfilling prophecy where enough market participants recognize and react to an level that it ends up exerting the expected influence. In markets where there is no definitive driver on the fundamental side or alternatively when there is so much mix that it is difficult to register a clear view, technical analysis can be the motivator or tiebreaker. Also, when markets are less liquid - either on a persistent or temporary basisi - there can naturally be a heavier influence by the speculative rank. The USD/JPY exchange rate is burdened with a number of conflicting themes, but it is one of the most liquid pairs in the market. There is constant interest from central banks, large financial institutions and funds that can readily drown out traders. And, such groups rarely base their decisions on charts.

Risk Trends Can Cater to the Yen Crosses Among So Many Other Markets

To truly rouse USD/JPY conviction amid all market participants and make this a clean opportunity for me, we need a deep fundamental theme to convince the rank to back the move. There are two general paths for which I believe the pair can find its motivation. The first is risk trends. The Yen crosses share a relationship to the ebb and flow of speculative sentiment that we see so frequently in shares, emerging market assets and junk bonds. Carry trade has proven to be somewhat wayward from its connections to this rudimentary market course lately, but the influence can readily seize control of the market with proper motivation. That said, risk appetite doesn't look too robust whether I'm referring to the correlation and charge across speculative assets or just confer with a preferred benchmark like the S&P 500. Could risk trends even regain traction? It seems the market's appreciation of risk/reward for continued advance in capital markets has changed the dynamic of the market.

USD/JPY: When Clear Technicals Just Aren't Enough

A Long-Awaited Recovery from the Dollar

The other deep well of motivation for USD/JPY is a genuine recovery from the US Dollar. The benchmark currency was battered through 2017 and arguably sits at a hefty discount to some traditional fundamental measures (like rate forecasts and growth). It was the greenback's rally to start the week that seems to have rendered this tentative technical turn. Looking across the other Yen pairs or an equally-weighted index shows none of the climb much less the remarkable progress of this benchmark exchange rate. There are a few other majors stumped for a Greenback advance as well, but the critical players - EUR/USD and the ICE's DXY Index - have yet to signal their own break. And even if a break comes, there is still a critical need for true motivation to provide reliable follow through. Rate forecasts are one area where bulls are pointing, but why would this only come into play now and not the past months? Easing up the pressure of trade wars and political risks wouldn't prove a genuine bullish wind, just the absence of pain. We discuss the merits and risks of USD/JPY's technical reversal in today's Quick Take Video.

USD/JPY: When Clear Technicals Just Aren't Enough

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