Talking Points:
- USD/JPY has fallen and stayed down
- It’s now closing in on what could be a key uptrend channel
- AUD/JPY has recovered, meanwhile, and looks set for more gains
Which 2018 trading opportunities do the DailyFX team of analyst find most compelling? Find out here.
The Japanese Yen has posted strong gains against the US Dollar in the past week, taking USD/JPY back to lows not seen since mid-September last year.
The fundamental justification for these moves is clear enough. The greenback has been under general pressure thanks to increasing market certainty that other developed markets will see tighter monetary policy in due course, crowding a field which for much of last year belonged solely to the US Federal Reserve. The Eurozone is held to be the most obvious candidate as stronger economic data see bets rise that stimulus withdrawal will accelerate.
The Yen has had a specific, domestic driver, too, even if its rationality is open to question. The Bank of Japan trimmed ever so slightly the amount bought at its regular bond-market operations last week. This was seen by the market as a sign that even Japan’s extraordinary accommodative monetary policy could be tightened and the Yen duly rose. Now the Bank of Japan has effectively denied the markets’ implicit charge since. It has stuck to its ancient line that all current settings will remain in place until inflation rises sustainably. But the Yen has not weakened, suggesting perhaps that the markets do not wholly buy this line.
In all events, USD/JPY’s fall to the 110.24 region puts early-September’s lows in the 107 region in focus, and they were the lows for 2017 as a whole.
If we look a little further back for clues, we find USD/JPY now within striking distance of what could be a quite significant longer-term upward channel on its daily chart. This channel is rooted in the lows of September 2016. Its lower bound has quite a few validation points, not least the intraday low of November 9, 2016 which provided investors with a very broad daily range but a rather smaller actual gain.
Channel upside need hardly detain us long as a test of it looks most unlikely in the near term. However it is probably worth pointing out that that upside is necessarily bounded by the highs of late 2016 and early 2017. These look like outliers now, given the trading action before or since. A more valid channel top would probably take in the lower highs of March or even May 2017.
Still, the point is that this reasonably long-term uptrend will be in serious trouble for the first time in its history if the Dollar closes below 109.75. That is not very far from current levels.
By the same token of course US Dollar bulls may be able to defend this uptrend. But the contest should come soon and its outcome will be worth watching.
The Australian Dollar took a knock against the Japanese currency at about the same time as USD/JPY began to fall more heavily, around January 10. However, AUD/JPY has fought back far more convincingly with rises chalked up for the past five sessions, albeit quite modest ones.
Aussie bulls need to make progress above that January 10 fall, which means they need to retake 88.78, before moving on to an assault of the previous high, January 5’s 89.08. At the moment the Aussie seems to have enough tailwind to suggest that both levels could be tested. Official Chinese Gross Domestic Product data on Thursday could provide the fundamental impetus, especially if they show growth comfortably in the ‘better’ region of Beijing’s “6.5% or better” target. Analysts expectations centre around a 6.8% gain.
--- Written by David Cottle, DailyFX Research
Contact and follow David on Twitter: @DavidCottleFX
