An Analysis of USD/JPY

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The USD/JPY currency pair is one of the most commonly-traded currency crosses in the FX market, second only to the EUR/USD. This cross rate is an indicator of the relative interest rate outlook of two of the most important economies on the planet, and as such it is key to determining future global economic health. USD/JPY is not only used as an indicator of the strength or weakness of the Japanese market, but it is also used as a common designation of the entire Asian economic resiliency as a whole.

The USD/YEN rate has changed dramatically over the course of the past two decades along with the fortunes of two of the world’s major economies. From the weak yen stance of almost 150 yen to the USD, to the extreme tightening of the Japanese currency to around 80 yen to the USD in 2012, the USD/YEN cross rate is one of the first indicators examined by global traders and investors every morning.

Taking a long-term view, the yen appreciated significantly against the USD for five full years from 2007 to 2012, strengthening from 122 to 75. This period coincided with the start of the subprime mortgage lending crisis, culminating in the moderate recovery in the US economy, which saw a steady rise in US interest rates. Since then, the US economic improvement has faltered with both the USD/YEN and the US stock market entering a period of consolidation. The USD/YEN rate itself has been held in a tight symmetrical triangle formation between 100 and 120 yen suggesting that no clear direction in interest rates has been provided by either the US Federal Reserve Bank or the Bank of Japan.

Trendline analysis of the holding formation in which the USD/YEN has been stuck since 2017 does give some clue that the overhead resistance line formed from the top of the market at 125 yen in mid-2015 and four more peak yen levels may have been broken. The conclusion from this analysis is that further weakening or sideways consolidation of the yen is likely in the near term. The USD/YEN chart broke overhead resistance at 110 in mid-2018, with the yen depreciating to almost 114. The yen then strengthened in a reaction move back to the previous resistance line at 108, where it found some support before weakening again to its current level around 110. In order to reverse this weakening position, the yen would be required to break the old resistance (now support) line by strengthening beyond the 108 level.

Exponential moving average analysis (13-period) suggests that the yen will continue to strengthen in the medium term, on a daily basis, which is confirmed by weekly trend analysis. With the recent break of a yen resistance level at 109.90, this analysis does indicate further yen strength against the greenback. The stochastics oscillator indicator does not show any immediate strong moves ahead. Taking this into consideration, along with the trendline and moving average indicators, it is reasonable to suggest that the USD/YEN will continue to trade in a range of 109 to 110 until a clearer picture becomes available.

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