USD/JPY a year later

We published a blog a year ago about USD/JPY (Pain threshold in USD/JPY) where we talked about downside risk in the USD after the approach to Y162. The USD did indeed turn lower and approached Y140 a few times since then. At Tricio we have deep experience in FX market research and trading. We publish Currency Matters on a monthly basis and our Monthly Insights covers Cable, EUR/USD and USD/JPY as well. We also cover central banks and FX markets in our podcasts on a monthly basis. As part of our ‘Investment buddy’ service we would be happy to discuss FX markets and hedging ideas with clients as needed.

What about USD/JPY now? In our view, the consolidation of the last year is potentially set to end with a sustained drop below Y140 expected to leave Y130 and lower open. Small beer in the big scope of market moves, but as John Calverley, Tricio’s Chief Economist, and I talked about last month, there is room for USD/JPY to fall towards Y110 or lower over the course of this cycle. A big part of this potential move is what is going on in JGB yields (weekly chart below). Most of our short and medium-term yield targets have been met with a move to 2% expected and the risk of seeing 3% yields during this cycle open. The last time JGB yields were above 3% was in the mid-1990’s when USD/JPY was throttling around Y110 to probes of sub-Y80 levels.

The chart of the spot rate (weekly, with 13 and 50-week moving averages, below) shows a potential top forming. A sustained drop below the blue (rising) and gold (falling) lines around Y140/Y138 would trigger a potential head and shoulders top. This is a very messy version of a potential reversal pattern, but the behavioural theory of the potential top (extreme optimism about the trend extending and a few bouts of reconsidering things) has been bubbling away for some time. A turn below these lines would leave Y120/Y118 attracting on a simple extension measure. The rising red line near Y130 and the flat purple line just below Y126 are potential USD support levels to watch, with the rising orange line near Y116 worth watching as well. On a long term retracement view, Y108.60 marks the 61.8% retracement of the rise from the Y75.55 2011 low to the Y161.99 2024 high, and serves as a long-term target.

Our RAM forward model (below) looks at the current spot rate relative to a series of forward rates (1-mth to 1-yr.). Instead of looking at the current 3-month forward rate vs. the spot rate though (as an example), the model looks at the current spot rate vs. the 3-month forward rate from 3-months ago. The chart below shows the model is still suggesting that yen gains could extend. The USD would need to regain the Y148/Y154 area in order to shift the model around, as these are the ‘pain thresholds’ now for Yen longs.