This is part 3 of my analysis of the Japanese yen market moves. Please check the other two parts below:
Part 1
Part 2
Why does my opinion on the Japanese yen exchange market matter? I have been actively involved in the forex markets trading my personal account for the last 12 years with leverage, and without leverage exchanging currencies ever since I started earning money from part time jobs 22 years ago. With the Japanese yen I have experience ever since I came to Japan in 2002, and I have directly experienced the exchange rate first go down from the 120s to the 70s, and then back up to the 130s. Numerous times I attempted to profit from market moves - selling yen when the yen was getting stronger or buying yen when it was getting weaker. But let's get to the point: will the Japanese yen go up or down from here?
Let me be direct: I can not answer the one million dollar question for the next move in the Japanese yen. If I could, I would not need to write a blog. I would just be trading the FX markets from my mansion next to the beach on some tropical island. Something like this (actually a golf practice range will be better than a tennis court):
Instead of making predictions, what I can do is explain what is happening in the market right now, and perhaps give some sort of a prognosis (no promises) of what we could expect next.
Today is July 30th 2022, and market trading for July 2022 has finished. So let us recap what happened in the USDJPY market this month.
Below is a chart of the moves in July 2022:
Having broken the big resistance at 135 in June, the market was very bullish for the USD and everyone was calling for the yen to quickly weaken to 150. As a result, in the middle of July the exchange rate soared to 139, registering a high print of over 139 on July 14th. But obviously that was not going to be the end to the yen weakening, right? No, we were on the way to 150, so everyone was looking to buy the USD and sell the JPY. In other words, the market was highly net short yen.
On July 20th I shared an article on the yen exchange rate on my LinkedIn profile. The link to the article share is here. My comment then was the following:
"The yen will strengthen down to 130 and less only when everyone agrees that it is going up to 150 and higher. We have almost reached that point according to my observations.
Reminder: The market will move in the direction, which will afflict the biggest amount of pain to the biggest number of participants."
It appears now that I was somehow right in my opinion. The market did go against everyone's consensus. The yen was at 138-139 on July 20, and at the end of the month it is at 133. But wait, why did it not go to 150? Why did it drop down to 133? Will it continue dropping? Let us analyze.
First, I will explain why the exchange rate dropped to 133. Of course, I had no way to predict this before it happened, but I can tell you why it happened. The reason was that everyone who was interested to sell the yen, especially in big amounts, had already done it at 139. There were no new sellers to bring the market over 140. Everyone had already sold the yen expecting it to go to 150. When there are no new sellers to push the market in the direction assumed by everyone, the market usually reverses. That is exactly what I meant in my post on July 20. We cannot be sure about the details of what happened after July 20, such as who was buying the yen, but the result was that in just 9 days the yen made the trip from 139 to 133. The sharpest fall was from July 27 to 29, when we went from over 137 to under 133. That is close to 500 pips (100 pips=1 yen) in FX language.
The sharpness of this move (almost 5 yen in a few days is big for USDJPY) tells me that there was a lot of forced yen buying coming from margin calls. A margin call is when you have taken a position using leverage, and the margin in your account is eaten up. As your margin goes down, your broker calls you to ask you to increase your margin, in order to make sure that he does not lose money when your margin is gone. Let's say you have $10,000 in your account and you invest it all buying USD and selling JPY with 1 to 100 leverage. That $10,000 x 100 allows you to buy $1,000,000. Every 1 yen move in the USDJPY exchange rate then results in you making or losing $10,000. If the market goes in your direction, you double your money. If it goes against you, you actually lose it all. The broker will give you a call to put more money in your account based on their policy - could be at a 50% loss, could be at a 90% loss. In some cases they just close your position forcefully at a certain percentage of loss. When your yen short position is closed forcefully, you end up buying the yen, which brings the exchange rate even lower. In that way, we get exaggerated moves when buyers give up and sell. In this case, buyers of USD became sellers of USD and the USD weakened (the JPY strengthened) quickly.
That is what I believe happened this week as we saw this big 500 pip move. A lot of the yen shorts were washed out, perhaps some closed their positions on their own without margin calls, perhaps some even closed their positions at a profit. Good for them. The result is that now the market is not so short the yen anymore. We have reached a more neutral position, so perhaps the yen cheapening to 150 can resume itself in August. Well, not so fast. Let us discuss technical analysis next.
When trading FX, there are two major ways of doing things (apart from just doing things on a hunch, of course). Some trade on fundamentals, such as GDP, interest rates, and other economic data. For example, in the case of USDJPY, it is supposed to go to 150 at least according to fundamental analysis. The biggest reason is that the interest rate differential between the USD and JPY has been getting bigger, so usually the currency with the higher interest rate, the USD, is supposed to get stronger.
Apart from fundamental analysis, another methodology to approach market trading is technical analysis. Technical analysts look at past price action, usually as displayed on price charts, and try to predict future price action based on finding patterns in the most recent price action. Since I already gave you the fundamental analyst position based on interest rate differentials, let me give you my prediction based on technical analysis from looking at the exchange rate charts.
You might recall that just last month the JPY broke the 2002 high of 135. I covered that in part 1 of my JPY posts here just as we were struggling under 135. It was not easy to break 135 - huge 20 year highs. In terms of technical analysis, such a price ceiling is called Resistance (think of resistance as a ceiling). A previous high, in this case a 20 year high, is huge resistance, but that resistance was broken in June. Ever since breaking 135, the exchange rate went higher, eventually reaching 139. Once a resistance level broken, it is next considered a Support level. Support (think of support as a floor), as long as the price is above the support level, things are fine. In the case of the yen, as long as it is above 135, your best bet is to sell it and the 150 thesis is safe. However, once the 135 support is broken, it is time to reconsider. And there actually is one more component to price levels. When talking of price levels, we have intraday levels, then we have day closing levels, week closing levels, month closing levels, and so on. Obviously an intraday level, being short term, is not so significant. The price changes every second, so you have many intraday levels. A daily closing level is more significant, and when you go to the monthly closing level, the significance increases. In that sense, the yen going under 135 on an intraday level might not be a big deal, but actually closing the month of July below 135 is a big deal. July was actually a down month after a big up month in June, and while we can not say the uptrend is broken, the confidence of the yen short case is weaker now. Please take a look at a monthly candles chart of 2000-2022 below:
So what will follow next? Sorry, I do not have my crystal ball with me today, but I can tell you what to watch out for in the coming days. First, watch if 135 can be reclaimed. If yes, then another attempt at 140 will follow. But also watch for 130. If the yen strengthens below it, we will be trying 125 next. 125 was the big resistance in 2015, and now it will be huge support. So for now we have a range of 125 to 140 and 136 is the mid-level. It is like a tug of war, and you evaluate the two teams' chances based on how far we go from the mid-level in each direction. Over 135 is yen bearish, under 135 is yen bullish. My prediction? No prediction, but I do not believe 140 can be broken. My most likely scenario is rangebound between 125 and 135 for a few months at least. But let me update you again next month. I hope to make this analysis a monthly one. But please, do not blame me for your losses if you follow my prediction, okay?
And of course, positions disclosure: I do not have any leveraged positions in USDJPY at the moment. I am mostly JPY long through my yen savings (80%) and JPY short through my investments denominated in USD (20%). And of course, my salary is in JPY, so I root for the yen to strengthen...