USDJPY and Yen Cross Rates look bullish

Before I start on rambling, I need to make a confession with regards to USDJPY: i get long term forecasts mostly wrong on this pair. This pair frustrates me and my P&L often. So, I mostly avoid it and trade JPY cross-currencies based on 4 charts instead.

I went through my previous bold bullish statements and they were based on the breakout from a multi-month base and/or a break of a major trendline. Bullish spurt followed after a breakout but then the pair lost steam and my bullish prognosis went down the trash bin. Since then, I try to avoid major trend reversal type forecasts on this pair. In short, trying to identify bottoms did not work because the trend was still down and still is actually.

This is my another prognosis attempt, not long term but near term, maximum a month. After that, we will see what the price action tells us. Hopefully, it will not blow into my face after a few days.

I have to admit that an FX Concepts hedge fund letter (Feb 9) on Yen prompted me to evaluate daily charts more closely. Having studied charts, I think I agree with them. The purpose of this blog entry is to give actual entry and exit levels for traders unlike FX Concepts letter.

This is the snapshot of USDJPY and cross rates daily charts.

1. USDJPY has been building a base since the end of last July. It is about to test the daily downtrend drawn from Apr 06 2010 and Jan 24 2012. The 2nd upper green line is the weekly major down trendline. Finally, the horizontal blue line at 78.28 is the daily resistance line. All those down trendlines and the daily resistance need to be broken to confirm the bullish reversal. The problem for this pair is this, the next major resistance is at 80.00 (not shown). So, even after a daily breakout through 78.28, the bullish move is likely to sputter just after 172 pips. FX Concepts thinks it will break through. As to me, I do not know or even I do not think it will be able to.

Anyway, the best way to express JPY bearish stance is via EURJPY, GBPJPY and AUDJPY as we are likely to get more bang (pips) for our efforts. These cross currency charts look very bullish and the strategy is to buy the dips.

2. EURJPY (bottom left) broke above ascending triangle and another strong resistance at 102.76. Any re-test of this now support should be bought. The next resistance is 105.20/45 not shown but this area is the minimum target.

3. GBPJPY (bottom right): similar to 2. Close above 122.50 today will give us the breakout from ascending triangle. It can test 122.50 tomorrow where our buys should be. The next resistance is 123.97/124.00. This pair is emerging from a multi-month double bottom (higher 2nd bottom). So, if my reading is right, it should go at least to 125.60

4. AUDJPY (top right) is the strongest looking of all. It broke out of the multi-month symmetrical triangle and 82.50 resistance which is a buy area should it fall back to test. It is now heading to the next resistance at 84.00/05 which I think is going to reject the first test and send it back closer to 83.00, the buy spot. It is then that we have to be watching to buy! DAily close above 84.00 leads us to the next target at 85.90/86.00.

Finally, at what levels do we bail out? In other words, where will the stop losses be?
EURJPY: 101.60   GBPJPY: 121.60  AUDJPY: 82.00

I know stops are pretty wide versus the current price, therefore I will only buy the dips based on 4h. This is when RSI is likely to fall back to 60 level or below. No need to enter into a trade in a hurry with a crap reward to risk.


Below is the latest FX Concepts newsletter on Japanese Yen written by Jonathan Clark. It is the largest FX hedge fund out there. FX Concepts and UBS TA team are calling for a a top in risk assets mid to end March or even early April. Time will show.

Japan’s Ministry of Finance recently released the details of its intervention to sell yen and buy dollars at the end of October and early November. On October 31 the Bank of Japan bought $107 billion and during the subsequent four trading days it bought a total of $13 billion. By way of contrast, the intervention on August 4 was $58 billion. The scale of intervention was enough to scare the market so significantly that there has been no need to

further intervene since that time.

Intervening multiple times in a month is a tactic the Japanese have used in the past. One of the most aggressive times was in the months following the Great Hanshin (Kobe) earthquake on January 17, 1995, which was the most devastating in 72 years as 6,400 people lost their lives. The yen strengthened 24% in the three months following this tragic event and the Japanese intervened more than 20 times in the month of March alone. Following the yen’s peak on April 19 of that year, it fell 46% during the subsequent 40 months. Japanese monetary authorities have the ability to hold down the value of their currency when global markets are optimistic, as buying dollars increases reserves and if unsterilized it is a form of monetary easing, which further undermines the yen. Recently, some of the major yen crosses such as EUR/JPY, GBP/JPY and AUD/JPY have begun uptrends that argue the yen will be weak against at least the other major currencies, and the dollar will too. However, a peak is likely in late March, when we expect the risk rally to end. Once again, the yen will strengthen, forcing the MoF and BoJ to intervene despite the disapproval of other G7 members.

The cycles were calling for dollar/yen to form a medium-term low next week, but it now appears it has already been seen. This projects an initial peak during the week of

February 27 and it should challenge the resistance at 77.80. If this level breaks on a closing basis, we will become more excited about the upmove and our initial target is the

79.00 area. USD/JPY should then pull back for a week, but provided it lacks much weakness, the uptrend will resume into the end of March and our further objective will become the 81.75 area. Although we can see a scenario under which the uptrend becomes stretched and lasts into May, this is less likely. By the end of March, dollar/yen will probably turn lower and decline into the third quarter of the year and once again the Japanese monetary authorities will be forced to fight the move, with 75.50 a likely place.