The Japanese yen has fallen for the third month in a row. The USDJPY has reached the highs since mid-2017 with strong resistance in the 114.00 area. Will the strengthening continue and what targets can the pair reach?
The strength of the USDJPY pair since the start of the year has been supported by two factors: a rise in the dollar index and a fall in the Japanese currency. While the former was dominant at the start of the year, the Yen has now rapidly collapsed.
The USD was in demand as a safe haven asset to which market participants fled from the threat of a pandemic coronavirus or from uncertainty. Rising inflation was adding fuel to the fire, which should have prompted the Fed to tighten monetary policy.
However, it is now almost clear what the Fed will do – the market is preparing for the announcement of a tapering of its bond buying programme in November. And against the background of the quarterly earnings season, demand for the safe-haven dollar has also weakened.
For its part, the yen is also traditionally seen as a safe haven asset. And when risk appetite rises, as it is now, no one is interested in it.
Moreover, Japan has a negative interest rate and a long-running printing press because of years of unsuccessful deflation. Bank of Japan Governor Haruhiko Kuroda says it will not be possible to deal with this problem before the end of his term (which is 2023).
What does that mean? The yen has no drivers for growth, especially with the prospect of monetary tightening by the Fed. But Japan does have cheap money, which is great for a Carry Trade strategy. Big players take currency in Japan and invest it in high-yielding assets such as US equities. And they make money on the difference between the lending rate and the yield received.
Thus, on the yen side we have no growth drivers, such as risk aversion. And we have catalysts for a fall: a cheap currency and increased demand for high-yielding assets. It is not certain that this situation will change any time soon. Therefore the fundamentals for a weaker yen (USDJPY growth) remain in place.
And now about the targets. Technical analysis has not been cancelled and there are two interesting facts.
The first one is the resistance level at 114.00. Today a pullback started from it, which was probably caused by a partial profit taking. What is important is for the price to break this level and consolidate higher, ideally confirming the pullback as support.
The second is a bullish flag on the weekly chart, which started to form at the beginning of 2021. It is a trend continuation pattern and the shaft of the second flag is now looming. If it works out its potential, the USDJPY will have scope for a move to 118.00, which by the way, is the high of December 2016.
As we can see, there are preconditions for growth. The main thing is to wait for a breakdown and fixation of the pair above the level of 114.00.
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