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The Case for a Higher USD/JPY

Since the 2016 Presidential election rally, it failed to follow U.S. stocks higher. Every attempt to push higher was met with selling pressure only. And, it wasn’t anything Bank of Japan-related, but pure market speculation and positioning.

However, now that it is back above the psychological 110 level, bulls have a case to argue for even higher levels. And, for a good reason.

An almost perfect risk off/risk on, the USDJPY pair got stuck in a consolidation overdue for a break. Here are some arguments for a bullish break and what are the conditions for it to happen.

Bullish Flag on Weekly Threatens with New Highs

The Trump’s election generated an almost vertical move on the U.S. stock market. Naturally, the USDJPY followed suit. However, the 118-area proved to be a tough nut to crack.

At the same time, the USDJPY got rejected from the above-mentioned level, the U.S. stock market continued making all-time highs for months and months in a row. Hence, the two, otherwise correlated assets, decoupled.

After a small double top around that level, the pair started to drift lower. And, it drifted for the following one and a half years.

USD/JPY Weekly Chart

However, the drift lower following an almost vertical move spells trouble for bears. It opens the gates for a bullish flag, with the Trump’s election reaction being the pol and the drift lower the flag.

The measured move for this classic technical analysis pattern points to a break of the 125 area where the price peaked after the Bank of Japan easing frenzy stopped.

Higher Lows Series Holds

Despite the last three years challenges like:

  • The flash-crash in August 2015 when the U.S. stock market dropped aggressively in a matter of minutes
  • The SNB (Swiss National Bank) dropping the EURCHF 1.20 peg
  • Brexit
  • S. Presidential elections, etc., the pair, while sensitive to all risk-off data and sentiment, failed to break the higher lows series that defines a bullish trend.
USD/JPY Weekly Chart

Not only that the series didn’t break, but the price kept bouncing from support and now threatens to break the major bearish trendline. If successful, it opens the gates to a quick move above the 120.

Conclusion

With summer trading conditions just around the corner, look for the VIX index to print lower and lower values. Hence, with the U.S. stock market “levitation” conditions set, the USDJPY may be in for the break of recent years consolidation.

A clear break beyond the main bearish trendline, while the 100 level holds, is enough for a push to new highs. The key ingredient to the bullish scenario: the series of higher lows must hold.

This article was written by AMarkets

This article was originally posted on FX Empire

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