Japanese Yen Talking Points:
- While the USD has been ranging since the December FOMC meeting, the Japanese Yen has remained on the move, initially pulling back from the late-month spike with JPY bulls then making another forward push.
- With inflation at 40 year highs in Japan and with the Bank of Japan preparing for a change in leadership in April, expectations are building for some sort of change around Japanese monetary policy. And given how loose and passive that policy has been, logically, any moves or changes would take on some form of tightening, and this is driving the bull case for JPY at the moment.
- The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
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The Japanese Yen was range-bound for much of last year’s Q1, standing in stark contrast to Q1 of 2021 when the bullish trend in USD/JPY was just getting ready to launch. In 2021, hopes for recovery were building and this was being voiced through interest rates, with the expectation that the Fed would, at some point, need to hike rates.
While the Fed didn’t actually begin hiking until 2022, the move in rates helped to spark the USD/JPY bullish trend. The Bank of Japan was one of the more loose and passive central banks in the world and as rates were beginning to lift, the prospect of carry was coming into the equation and carry trades can become massive FX drivers. My Q4 2021 Top Trade was the long side of GBP/JPY, largely driven by my expectations around this theme as the world started to prepare for lift-off. And while Q4 did produce a net gain in USD/JPY (and GBP/JPY), the door opening to 2022 is what really kick-started the Yen trends that dominated for the first nine months of last year.
The reason for that is, once again, carry trades. With the JPY remaining as one of the lowest-yielding currencies in the world, backed by the Bank of Japan’s negative rate policy, the Yen was a favored funding currency. So traders could buy currencies like USD or GBP or even the Euro, which were seeing rates go up – while funding those trades with low-yielding Yen. This allowed for traders to capture the carry via swap or rollover payments; but also brought the possibility of principal accrual as other traders jumped on to this trade.
This helped USD/JPY to spike up to a fresh 34-year high in October of last year, finally tagging the 150.00 psychological level for the first time since 1990. Since then, however, a different them has started to take-over.
USD/JPY Monthly Price Chart
USD/JPY Since 150
That 150 print hit in the middle of October on a Friday morning. Initially, prices surged beyond the psychological level by almost 200 pips. But this quickly reversed with prices aggressively-spiking lower, setting a low for that session at 146.16, which makes for a 579 pip reversal on the day that the pair was able to finally test above the 150 handle.
More pressing, however, is what’s happened since the spike, and buyers have not been able to get back in the driver’s seat on USD/JPY, helped along by another spike in late-December as expectations began to build that change may be afoot.
USD/JPY Daily Price Chart
Chart prepared by James Stanley; USD/JPY on Tradingview
Carry Unwind, USD/JPY Support Test
With the carry trade pushing USD/JPY higher throughout last year, the prospect of change at the BoJ and, in-turn, the amount of swap or rollover that can be earned by holding long positions; the opposite effect can work, as well. When rates in the US are going-lower or there’s the potential for the BoJ to move away from their uber-loose policy, well now there’s reasons for traders that had went long on the way up to close the position.
This is known as carry unwind and as we saw in December, it can work very quickly, especially on the heels of an announcement or even a subtle hint that change may be on the horizon. This is why the downside moves in USD/JPY were so violent and fast, as traders quickly sold out of positions and as support was pierced, more stops were hit, adding more supply to the market which led to a further and further fall.
In USD/JPY, the rates picture is still of interest as the Fed continues to lay the groundwork for more hikes in 2023. Elsewhere, however, questions abound about rate hike potential and that’s where some deviation in JPY setups can be of interest.
USD/JPY Four-Hour Chart
Chart prepared by James Stanley; USD/JPY on Tradingview
The Euro was very weak for the first nine months of last year but, not quite as weak as the Japanese Yen. This is well illustrated by the pair’s bullish trend that held for most of 2022 trade but, it also happened in an uneven manner. The bullish trend in EUR/JPY last year built in as a rising wedge. Such formations are often approached with the aim of bearish reversals and that’s already started to take place, with some help from that JPY spike in late-December.
EUR/JPY set a fresh lower-low yesterday and is now bouncing from that. The big question is where a lower-high might appear, and the recent lower-high was at the trendline projection on the underside of the rising wedge.
Resistance potential remains at the 140.00 psychological level that’s currently being tested but, from a price action perspective, there may be a better case for that resistance at the prior swing low around 140.88.
EUR/JPY Daily Price Chart
Inflation at 10% while in a recession, or moving into a recession, is a pretty undesirable spot for a Central Bank. This explains the position of the Bank of England at the moment where inflation remains well-above target but, as we’ve already heard the bank opine, as the BoE said in November that they’re anticipating the longest recession in over 100 years.
GBP/JPY had a similar outlay as EUR/JPY in 2022, with extreme strength in the first nine months of the year driven by the carry trade; and the start of that theme unwinding showing up in Q4.
The bearish side of GBP/JPY is my Top Trade for Q1, 2023 for this reason as I’m expecting the carry trade to continue to unwind. The pair has already put in an aggressive bearish move down to the first target at the 160.00 handle. There is one more target remaining, however, and that’s at a major spot of support around the 149.00 handle.
At this point, price is bouncing from Fibonacci support and there’s resistance potential overhead, in the zone spanning from 159.46 up to the 160 psychological level. If it breaks out above 160.00, the next point of resistance shows up around 162.50 which is a prior swing high that’s confluent with the psychological level.
GBP/JPY Daily Price Chart
CAD/JPY was one of my better setups in Q4 and it really started out of a state of consolidation. Similarly, a bullish trend drove the pair for much of last year. But as the page turned into November and as the Canadian Dollar started to weaken and Japanese Yen strength started to make a re-appearance, the prospect of reversal began to open up.
CAD/JPY broke-below a key trendline on November the 10th and sellers just continued to push, driving the pair for more than 1,000 pips over the next month-and-a-half. At this point, coming into 2023 trade, the pair is showing oversold readings from a number of vantage points, which is itself not a bullish driver but a ‘less bearish’ indication.
More interesting, however, is the recent show of CAD-strength, begging the question as to whether there’s change afoot in the Canadian Dollar. There’s possibility of reversal, as well, as price has built into a falling wedge pattern. Near-term support can be sought in the range between two Fibonacci levels at 96.55 and 96.98, with trendline resistance just overhead at the 98.00 handle. If bulls can force a breach, the possibility of reversal brightens a bit, and next resistance focus goes to the 99.43 price swing.
CAD/JPY Four-Hour Chart
— Written by James Stanley
Contact and follow James on Twitter: @JStanleyFX