has been one of the most active markets to start the year, finding itself at the intersection of trading trends related to negative interest rates and monetary policy plus capital flows into and out of defensive havens. With so much data coming out this week ahead of key FOMC, ECB and Bank of Japan meetings in March, JPY may once again be at the centre of attention with the potential for significant moves in both directions depending on what happens.
Between mid-December and mid-February, USDJPY plunged in two stages, falling first from near 124.00 to near 1156.00 then after a bounce toward 122.00, a second drive down to near 111.00. Last week, the pair successfully retested 111.00 to complete a double bottom, bringing the downtrend to an end for now and has started to rebound.
So far, the pair has completed a 23% retracement of its previous downtrend, rallying up toward 114.00 with next resistance possible near 115.00 a round number and previous high, then 115.90 the 38% retracement level. Initial support has moved up toward 113.00 the midpoint of a 111.00 to 115.00 potential base building range.
The RSI momentum indicator has played a significant role in indicating turning points. The big selloff was preceded by a rare but bearish head and shoulders top pattern in the RSI indicator. Ahead of the bottom, the RSI became quite oversold and a positive divergence of higher lows emerged.
Three major forces have been driving the big moves in USDJPY in recent weeks.
1) Defensive haven trading: high volatility in stocks and oil to start the year created a lot of apprehension sending capital flowing into defensive havens. In 2015 the USD was the haven of choice but having moved up so much, traders started to seek out cheaper alternatives this year, fining them in JPY and gold and sending them soaring.
The recent double bottom in USDJPY which coincided with a double top in gold combined with a rebound in crude oil and stock markets suggests the fear trade may be subsiding and capital returning to risk markets.
2) Negative interest rates in Japan: The Bank of Japan adopted negative interest rates at its last meeting. The Yen had been falling ahead of that meeting (the USDJPY January bounce) but then plunged afterward as the move backfired on the currency sparking another wave of fear about the world economy and provoking the Fed to start issuing threats about negative interest rates in the US.
3) US interest rate speculation: In recent weeks, the Fed has been backing away from hawkish talk of four rate hikes this year toward a more neutral to dovish stance. The big USD advance of 2015 priced in several rate hikes this year so backing away from that sent USD lower against other currencies like JPY. Talk of US rate cuts and negative rates may be red herrings but appear designed to discourage other central banks from using negative interest rates to devalue their currencies and boost their economies at the Americans expense. (US companies continued to complain about the negative impact of the high USD on their earnings this quarter)
In the last couple of days, a big turnaround in US durable goods, a surprise upward revision to US Q4 GDP and a surprise increase in US inflation (Fed members have been expressing concern about falling inflation lately) has put a March or April interest rate hike back on the table boosting USD.
This week, there is a ton of economic news coming out including global manufacturing and service PMI reports, Japan’s monthly basket of key indicators, employment for the US, Canada and Germany and much more.
These indicators could have a significant impact on trading in many markets, particularly USDJPY. Positive economic numbers for Japan could send JPY higher while disappointments could send it lower further. Positive data for the US could send USD higher (increase the change of a March rate hike) while missed could send the greenback back down. Strong data may also continue to send capital back out of defensive havens while week reports could send fast money back into JPY and gold.
In addition to USD, JPY could be active against other currencies including EUR (speculation on further ECB stimulus this month), GBP (ebbs and flows of Brexit vote concerns) and CAD (rise and fall of the oil prices).