Persistent US Dollar weakness has been commonly accepted. So, with last week’s bullish reversal in the USD/JPY (Dollar vs Yen forex pair) followed by today’s continuation pattern and new 1-month high, this post is more than a justifiable pause for the cause. Is this breakout legitimate? As the major trend still remains bearish, I am inclined to say no and dismiss it as nothing more than a relief rally. Right now, the USD/JPY is approaching resistance at the 61.8% retracement level. In the event that it surmounts this, then 112.97 @ the 78.6% level becomes the next test and afterwards @ 114.50 for a 100% Fibonacci move.
Fundamentally, such a move would require an unexpected major change in the economic landscape or central bank policies. This week, the Federal Reserve meets over a 2-day period and afterwards Chair Yellen announces its monetary policy. Fed Fund futures are assigning less than a 50% chance of a rate hike. The US economy is still expanding and equity markets are hitting all time highs. Countering this are some signs of weakness emerging in the retail sector and the yet-to-be-felt economic aftershocks of Hurricanes Harvey and Irma.
If I had to wager, it would be continuation of US Dollar weakness. Don’t forget that the deficit ceiling and budget shortfall still have not been resolved in a sustainable manner, but merely with a bipartisan (Trump and Democrat) band-aid. Quantitative Easing (QE) is unwinding and the balance sheet run-off (non-reinvestment of bond proceeds at maturity) is already an indirect form of tightening. Be wary of this rally in the USD/JPY forex pair.
Related securities: Exchange Traded Fund / Japanese Yen Trust (FXY). Note that while the FXY mimics or represents the USD/JPY forex market, it does not provide the leverage of the forex market and its price movement is inversely correlated to the USD/JPY. Depending upon one’s investment bias, purchasing option calls or puts may be used to capture some of the leverage potential of the forex market, while limiting one’s risk exposure to the cost of the options. Consult your investment advisor to determine if such a strategy is suitable and make sure you thoroughly understand the risks associated with futures, forex and options.