The U.S. Dollar Is Just About To Put The Yen Into Checkmate

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Includes: FXY, JPYS, JYN, UDN, USDU, UUP, YCL, YCS
by: Sandeep Singh Ahluwalia

Summary

The USD/JPY turned snappishly bearish after fear gripped the financial markets.

The trade woes between America and China shall continue to sway the currency pair.

The technical picture has turned bullish after the recent fall.

The US dollar this week started to trade in a downward channel against the Japanese yen after which due to some minor fluctuations the pair managed to close the week at Thursday's opening level. Thus, in this article, we shall look at the probability of the Japanese yen strengthening against the US dollar as I believe the pair shall trade sideways for a few sessions after which the US dollar shall resume its ascent. If it does so, then investors shall have the perfect opportunity of going long on the pair. Hence to ascertain this, I shall look at the fundamental news affecting the pair whilst also analyzing the charts using technicals.

Fundamental news:

On the fundamental news front, the week commenced with high levels of optimism but this was then dampened by trade related issues. Below are the fundamental reasons affecting both the pairs:

  • Trade: The week commenced with optimism after US and China agreed to hold off on the trade war. However, things went downhill very fast after President Trump expressed discontent over talks with the worlds’ second largest economy. Furthermore, the administration announced that it is considering imposing new tariffs on imported cars and this will certainly dampen the global trade atmosphere.
  • North Korea: The most significant development this week was the announcement made by President Trump that the Summit with North Korean Leader Kim Jong-Un was cancelled. Even though there were several warnings signs about this, the markets were still caught pants down which in turn sent the USD lower. However, if talks do manage to occur on 12th June then the US dollar shall rise sharply.
  • Japanese inflation: The inflation figures of May showed that prices in Japan rose by a mere 0.5% year on year and this did bolster the position of the Japanese yen as the statistics were better than analysts had expected.
  • US data: The data that was released this week for the US economy missed analysts’ estimates. The level of existing home sales fell to 5.46 million on an annualized basis whilst new home sales tumbled to 662,000 on an annualized basis. Moreover, the number of jobless claims rose to 234,000 which did really irk investors.
  • Fed expectations: The US dollar was also swayed by news released from the Federal Reserve meeting that took place on 24th May. The chair of the meeting Jerome Powell insinuated that the Fed was contemplating about raising rates in June. Moreover, I expect this news to have a spillover effect into the coming week as investors shall be circumspect about it.

Overall, on the fundamental news frontier, the key news investors should observe in the coming weeks is the trade war with China plus the North Korea Summit. If the North Korea Summit does manage to occur then we could see the US dollar having a very strong bullish run. Moreover, if the US government calms the situation down with China then we could also see the dollar rise against the yen.

Technical Analysis of The Pair:

USD/JPY Overview The pair for the past one and half month has been trading in a bullish channel that has helped it rise from a low of ¥104.56 to a high of ¥111.10, which in forex terms is a very healthy level of return for an investor. The pair then entered a box range on 5th to 12th April which resulted in the duo closing above the 50-day moving average which fueled a further bullish move. Moreover, the pair has always followed its Fibonacci resistance lines and this can be seen in the chart above. We see that whenever the US dollar touched the 161.8% resistance level then this resulted in a sideways movement for a few sessions. Furthermore, the current tumble below the channel support also commenced after the pair touched the 161.8% level at ¥111.10.

USD/JPY Daily Chart On the daily chart, the pair is at a crossroad as it has just completed a three black crows pattern which caused a substantial downward move that was followed through by a bullish Harami pattern. The first long real body signified to investors that the bears have control of the pair whilst the second small real body reflects that the bears have now lost steam. Moreover, the duo has now breached the 20 and 200-day moving average lines whilst taking support from the 161.8% support level at ¥109.15. All these signs on the daily chart, indicate to investors that the downward spiral has ended thus I expect the pair to trade sideways for the next few days as the bearish strength will be fully neutralized. After that, the US dollar shall commence a fresh rise due to it taking support from the 161.8% Fibonacci support level. Furthermore, the 161.8% Fibonacci support level is also a change of polarity level and a long-term support zone.

On the resistance facet, I expect the pair to rise to the 78.6% level which is at ¥110.71. Moreover, the 78.6% Fibonacci level is an area of prime importance as this is also a long-term resistance line. If the pair manages to break above this level then investors can expect it to reach the 127.2% level at ¥111.77. I do not expect it to be able to breach above the 127.2% level.

The big picture:

Overall, I am leaning toward the bulls taking the US dollar for an uphill ride which will cause it rise to the 127.2% Fibonacci resistance level at ¥111.77. But, traders can expect the pair to trade sideways for the next two to three sessions after which it shall commence the upward trajectory. Apart from technicals, the upward rise is also being fueled by the hope that the North Korea summit may occur as this shall be a historic meet that will aid in calming down many international anxieties. However, whichever way you decide to trade, do ensure that you utilize trailing stops, as they shall aid in capital preservation.

Good luck trading.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.