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Chart Of The Day: Japanese Yen Fundamentals Shift Dramatically... Technicals Too

Japan's yen opened lower this morning, extending its drop to 0.5% versus the US dollar. It was the sixth straight day of gains for the USD/JPY pair.

The JPY fell to its lowest level since Dec. 15, 2016, almost a five-and-a-half-year low. Another 0.1% dip would bring the Asian currency to its weakest level since Feb. 2, 2016, more than a six-year low.

The currency's weakness may surprise many traders who have come to narrowly view the yen as nothing more than a safe haven currency, an indicator of risk-on or risk-off sentiment. But the underlying fundamentals that once made the JPY a so-called safe haven have changed in tandem with the economic climate.

The yen first became a haven currency because Japan had a trade surplus. In addition, in 2018, the repatriation of Japanese investors who had previously sought greener pastures in a negative interest rate economy created a steady demand for the local currency.

However, in the current environment, the yen's strongest driving force is the Japanese economy's extreme reliance on commodity imports. With raw material prices for everything from grains to metals to oil surging, Japanese importers will have to continue selling more and more yen to buy the US dollar.

If that's not enough, the interest differential will become increasingly favorable for the USD, as the Fed begins hiking, even as the Bank Of Japan gets left far behind, still considering whether it wishes to end negative interest rates.

Concurrent with this drastic fundamental shift, the technical picture is equally, if not more dramatic.

USD/JPY Monthly
USD/JPY Monthly

The USD/JPY pair completed a monthly symmetrical triangle spanning the period between June 2015 and February 2021. Though that in itself is a big deal, we're actually addressing something even more monumental.

The pair has been trading above a trendline since the April 1990 peak. In other words, the dollar could be bottoming against the yen on a macro level. Such a reversal may harness the force to push the dollar versus the yen above 150.

The 50-week MA crossed above the 200 WMA in November, while the same happened on the monthly scale in 2016, but after the 50-month MA peaked out in late-2018; it has been on the rise since 2021.

Trading Strategies

Conservative traders should wait for the price to clear the macro trendline, then retest its support before entering a long position after such a sharp rise.

Moderate traders would wait for the price to fall back toward 116 or create new accumulation as a base from which to bounce off.

Aggressive traders could enter a long position at will, according to their personalized trade plan. Here's a generic example:

Trade Sample – Aggressive Long Position

  • Entry: 118.00
  • Stop-Loss: 117.00
  • Risk: 100 pips
  • Target: 123.00
  • Reward: 500 pips
  • Risk-Reward Ratio: 1:5

Trading analysis offered by RobotFX and Flex EA.