Short USD/JPY: Why This Could Be The Trade Of The Year

Includes: FXY, UDN, UUP
by: Discount Fountain


The Japanese yen is due to appreciate strongly against the US dollar.

Even with negative interest rates in Japan, the currency continues to strengthen.

Conversely, rising interest rates in the United States have been accompanied by a declining USD.

I am highly bullish on the yen going forward and anticipate that a big movement in the currency pair is underway.

The forecast for the Japanese yen is very different from what it was a year ago. In spite of negative interest rates, the yen continues to rise and Japan is quickly reaching its limits in terms of quantitative easing capacity. Conversely, in spite of interest rates being raised in the United States, we have actually seen a depreciation of the dollar. Taking these two factors into account, I am anticipating that a short position on the USD/JPY may just make for one of the biggest trades around this year.

Click to enlarge

When we look at the USD/JPY on the graph, we can see that we have significant support at the 120-122 mark and a resistance just above 110. However, on a long-term basis the yen has not seen a movement of such magnitude in quite some time, instead having hovered near levels of 125 throughout 2015.

I stand ready for a breakout of the USD/JPY to the downside, and have a sell limit order ready to execute with the following parameters:

  • Entry: 110.5

  • Trailing Stop Loss (price/pips): (113.80/330)

  • Take Profit: 107

The last big movement in the USD/JPY was just at the end of 2012, when we saw the USD/JPY shoot up from a level of 77 to 103. Similarly, just before 2015 we saw the pair rise from 101 to 122 in the space of three months. Accordingly, I am expecting a move of a wide magnitude again and see a potentially wide profit target. While a level of 87.5 may not necessarily be reached in one go, I am using a trailing stop of 330 pips to lock in significant profits in line with the trend while preventing a stopping out of the trade due to high volatility.

On a fundamental level, the reason for the USD/JPY being due for a big correction is simple; the economies of the USA and Japan have changed in a big way. While the raising of the interest rate was initially delayed, the eventual move sparked contagion and led to growth concerns in the United States.

Moreover, this was followed by statements from the Federal Reserve that a strong dollar could serve as an impediment to growth. Since then, we have seen the dollar go lower and instruments with a traditionally inverse correlation to the dollar (such as gold) go higher.

Across the Pacific, the Bank of Japan is acknowledging that quantitative easing measures cannot last indefinitely. While negative rates have been introduced, the yen has not depreciated in response. Instead, the yen has reverted to its status as a safe haven currency as global markets continue to head lower.

Moreover, a stronger yen is resulting in a lower frequency of "carry trades" domestically, whereby yen is borrowed at a low interest rate to invest in a higher yielding currency such as the USD. Given that central bank action is not succeeding in weakening the yen, the currency is now an attractive proposition in both domestic and international markets.

Given that the dynamics between Japan and the rest of the world have changed significantly in the past year, I am expecting a similar shift in the USD/JPY accordingly. I suspect that the downward movement in this currency could prove to be quite sharp, given a relative period of calm and highly anticipate that the 110 mark could be breached in the coming month.

Disclosure: I am/we are short USD/JPY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.