Yen Set To Strengthen Against U.S. Dollar

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

Summary

The U.S. Dollar descended to the projected range between 110.67 and 111.05.

In September, Japan's annual core inflation rate stood at 1%.

U.S. core retail sales in September fell by 0.2% against an anticipated rise of 0.4%.

The technical picture of the U.S. Dollar looks bleak, all thanks to a Bear Sash candle pattern.

In my last article, I was bearish on the U.S. Dollar (UUP) as I expected it to fall against the Japanese Yen (FXY). This came true as the U.S. Dollar fell to the projected range between 110.67 and 111.05. Moreover, once it descended to the projected level, the U.S. Dollar entered a box range formation as anticipated. However, I now expect the box range formation to come to an end, as I believe the Greenback will be tumbling till the range between 111.46 and 111.80. Hence, to establish the likelihood of this occurring, I will look at the fundamental news affecting the pair, whilst, also analysing the charts using technical analysis tools.

Fundamental news:

U.S. retail sales data:

The U.S. retail sales data in September rose by a smaller margin than expected. I say that as the retail sales figure rose by a mere 0.1% against an anticipated growth level of 0.7%. Moreover, the core retail sales figure fell by 0.2% against an anticipated rise of 0.4%.

This is terrible news for the Greenback as the core retail sales figure had a negative drop which will result in a build-up in bearish pressure. Moreover, the negative statistic reinforces my bearish stance as the recently released non-farm payrolls report also missed analysts' estimates. This is as the number of people employed, stood at 134,000 against an anticipated value of 185,000. Furthermore, the bad news doesn’t end here, as there was a sizable drop in spending levels at restaurants and bars. Additionally, this was the biggest drop witnessed in restaurant spending in the past two years.

Japanese Inflation level:

Positive news for the Japanese Yen seems to be pouring in from all quarters. I say that as the annual core inflation rate in September stood at 1% which is in line with forecasts, as analysts had also pegged it at 1%. Moreover, the inflation level is in line with the predicted range mentioned by the Bank of Japan in its prior meeting. This is very positive news for the Japanese Yen as it provides the currency with a significant bullish boost.

Failure of US Sanction against Iran:

In two of my prior articles on oil I had mentioned that I expect the U.S. oil sanctions against Iran to fail. I had made this presumption as I believed India and China were not going to adhere to the sanctions owing to their sizeable appetite for oil. This assumption of mine came true as we are at the end of October and Iranian oil exports are at an all-time high. I say that as Iran in the first two weeks of October exported a whopping 2.2 million barrels per day from a prior value of 2 million barrels per day. Thus, instead of reducing the level of Iranian oil, India and China have increased the purchasing quantity by 200,000 barrels per day.

This I believe will affect the value of the U.S. Dollar negatively as it publicly embarrasses the Trump administration. This is as President Trump was extremely confident that the sanctions would be successful. The other reason why I expect this to affect the value of the US dollar is due to India announcing that from the beginning of November they shall stop paying for Iranian oil using U.S. dollars, as they shall use the India Rupee to settle payments. This in turn will significantly lower the demand of the US Dollar in the international market, as Iran supplies India with a huge chunk of its oil demand. Thus, if India stops paying with U.S. Dollars then this shall create a big dent in the Greenback’s demand level.

Technical Analysis:

Daily Chart:

USD/JPY Daily Chart The pair’s daily chart indicates that in the coming days the Greenback shall be having a bearish fall against the Japanese Yen. However, before the bearish fall commences I expect at least two bullish days as the short-term exponential moving averages will cause a short bullish spurt, which shall result in the US Dollar rising from 112.63 to 112.95. However, after that I expect the bearish fall to once again commence. The reason I anticipate a bearish fall is due to the U.S. dollar forming a “Bear Sash” candle pattern. This pattern’s psychology indicates to investors that the tide of the market has changed from one in which the bulls were in control, to one in which the bears are now calling the shots. Moreover, the bearish pattern is reinforced as the U.S. Dollar is trading below its 20-day moving average. Furthermore, there is a sturdy candle resistance line at the 112.75 mark which is also the 61.8% fibonacci resistance level.

On the price target front, I expect the US Dollar to fall till the 38.2% fibonacci support level at 111.80. This is due to this level being a tried and tested candle support zone. However, if the Greenback does breach the 38.2% support level, then I do not expect the fall to go beyond the 50% fibonacci level at 111.46.

Weekly chart:

USD/JPY Weekly Chart The pair’s weekly chart indicates that the US Dollar is facing some tough resistance. The reason behind this thought of mine is due to the formation of an “Evening Star” pattern. The first candle in the pattern reflects to investors that the bullish trend is in force. However, the next candle’s small real body indicates to traders that the momentum is flagging. However, the final nail is put in bull’s coffin by the third candle whose bearish real body engulfed the first candle. This confirms to investors that the bullish rally has stalled. Moreover, the “Evening Star” pattern formed at the 100% fibonacci resistance level at 113.74. Furthermore, the candle pattern received a further bearish confirmation as the pair has fallen below the 200-day moving average.

The Big Picture:

Overall, I am leaning towards the bears pushing the value of the U.S. Dollar till the range between 111.46 and 111.80. This is driven by the fact that the technicals and fundamentals fully support a descent in the currency's value till that point. However, whichever way you decide to trade, do ensure that you utilize trailing stops, as this 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.