U.S. Dollar Set To Weaken Against The Japanese Yen

by: Sandeep Singh Ahluwalia

The U.S. Dollar descended to the prior article's price level.

The Federal Reserve meeting was extremely straightforward, as there was no rate hike and only minimal tweaks were made to the policy statement.

Chinese export levels rose by 15.6% in October, which was well ahead of the forecasted value of 11%.

I am leaning towards the U.S. Dollar bears being in the driver's seat.

In my last article, I was bearish on the U.S. Dollar (UUP) as I expected it to fall against the Japanese Yen (FXY) till the range between 111.46 and 111.80. This came true as the Greenback fell till the 111.46 mark. Moreover, once it descended to the projected level, the U.S. Dollar had a bullish reversal till the 114.06 price level. However, I now believe the bullish trajectory has come to an end, which will result in the Greenback falling till the range between 112.42 and 112.77. Hence, to establish the likelihood of this occurring, I will look at the fundamental news affecting the pair, while also analyzing the charts using technical analysis tools.

Fundamental news:

U.S. Midterm elections:

In my article on the effect of the Midterm elections on the currency markets, I stated that if the lower house was won by the Democrats, then the U.S. Dollar would rise against all currencies except for the Japanese Yen. This opinion of mine was based on fact that the Japanese Yen is a safe-haven currency. Thus, it attracts flows when there is bad news in any of its rival pairs. Therefore, due to the lower house being won by the Democrats, I expect the Greenback to have a fall in its value. This stance of mine is further solidified by the fact that President Trump’s wings have being clipped by the election. Hence, the Democrats can potentially investigate the government for any other possible conflicts of interest. This in turn will cause a dent in the value of the U.S. Dollar down the road.

Robert Mueller’s investigation:

As mentioned earlier, the Japanese Yen is a safe-haven currency and it is going to attain one hell of a benefit from the pending Robert Mueller investigation. I believe the political risks affecting the U.S. Dollar have not yet been overcome. I say that as in the coming days I expect Robert Mueller’s investigation to come into focus. Mueller would have refrained himself from reporting on the investigation in the run up to the election, as this would have exposed him to accusations of exerting influence. Thus, I now expect him to make some statements about the investigation into President Trump. Hence, due to this, I expect an increase in domestic political pressure which will have a bearish influence on the U.S. Dollar’s value against the Japanese Yen.

Trade war:

The latest trade data coming out of China will have a bearish impact on the U.S. Dollar. I say that as it hints at the sanctions not working well. China's export levels in October surged by 15.6%, which was well ahead of the forecasted value of 11%. This in turn will provide the U.S. Dollar with a bearish nudge, which will result in a fall in its value.

Federal Reserve:

I do not expect the Federal Reserve meeting to have any significant bearing on the U.S. Dollar. The meeting was extremely straightforward as there was no rate hike and only minimal tweaks were made to the policy statement. The Federal Reserve took note of the fact that business investment levels have been soft over the last two months. This type of guidance by the Federal Reserve has become synonymous with hikes being made after every other meeting. Thus, this a pattern which I believe will result in a rate hike occurring in December. Hence, I do not see the interest rate decision influencing the Greenback as it is neither bullish nor bearish.

Technical analysis:

Daily Chart:

USD/JPY Daily Chart

The pair’s daily chart indicates that the U.S. Dollar will be having bearish reversal against the Japanese Yen. I expect this due to the formation of a ‘Bearish Harami’ candle pattern. This pattern psychology indicates to traders that the bears have gained control of the market. Moreover, the candle pattern received further bearish confirmation as it formed at the 161.8% Fibonacci resistance level at 114.03.

On the price target front, I expect the U.S. Dollar to fall till the range between the 78.6% and 100% Fibonacci support levels. The 78.6% Fibonacci support level is at 112.77, whilst the 100% Fibonacci support level is at 112.42. However, if the Greenback does breach the 100% Fibonacci support level, then I do not expect the tumble to go beyond the 127.2% Fibonacci support level at 111.98.

Weekly Chart:

USD/JPY Weekly Chart

The pair’s weekly chart indicates to investors that the bullish rally has stalled. This is due to the current candle closing the week at the 100% Fibonacci resistance level at 113.93. Moreover, the 100% Fibonacci resistance level is also a long-term candle resistance line as it has suppressed the pair from having a breakout for the prior 19 weeks.

However, there is one bullish tinkle that makes the scenario a bit more confusing. I say that as the current candle has had a bullish close above the 200-day moving average line. But I would not pay much attention to this, as the pair has previously closed above the 200-day moving average, after which it had a strong bearish reversal in the next week.

The Big Picture:

Overall, I am leaning towards the bears pushing the value of the Greenback to the range between 112.42 and 112.77. This is driven by the fact that the technicals fully support a descent in the currency's value to 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.