Did USD/JPY Bottom Out? Forex Trading Strategies

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Did USD/JPY Bottom Out? Forex Trading Strategies

Konnichiwa! Today lets talk about Mr. Japanese Yen (JPY) who became the ultimate champion on the forex dance floor last week, while other currencies struggled to keep their heads up in the worst first trading week of a new year ever, thanks to oil and Chinese data slump.

In the past two days we’ve seen JPY pairs correcting their losses against Mr. Yen though. Is the correction here to stay? Here is a look at the fundamentals, technicals, and the Invest Diva Diamond altogether.

1- Japan’s Economy is Out of Recession, but Don’t Get Too Excited

In my previous USD/JPY update, we saw that the Japanese economy was struggling on many levels; From gross domestic product (GDP),  to inflation and consumer sentiment, all were pointing to the south.

However, comparing to last November, the Japanese economy has seen some improvements.

  • The final reading for Japan’s Q3 2015 GDP was revised higher from -0.2% to +0.3% quarter-on-quarter (-0.1% previous quarter),which means that the world’s third largest economy is at least technically out of a recession
  • Annualized industrial production is in positive territory again
  • Inflation rate seems a bit more promising as Japan’s November headline CPI increased by 0.3% on an annualized basis, which is the same reading as back in October.
  • Japan’s consumer confidence ticked higher to 42.7 from December’s 42.6, and better than the expected 42.3

On the down side,

  • Employment has been a bit of a drag as labor force participation rate climbed lower from 59.9% to 59.4%
  • Bank of Japan (BOJ) has been struggling to raise inflation more in the face of sliding global oil prices
  • BOJ Governor Mr. Kuroda seems mad, and said on Tuesday’s Asian session that the central bank should “act decisively” to get rid of a Japanese deflationary mind-set

So we may see the BOJ doing something about this soon…

2- US Investors are Used to Positive Data

Too much of a good thing is not so good it seems, huh? The U.S. jobs release beat expectations for the third month in a row, adding 252K jobs in December and keeping the unemployment rate chillin’ at 5.0%. More Americans actually entered the labor force to resume their job hunt, bringing the participation rate up from 62.5% to a four-year high of 62.6%. To sweeten the deal, previous reports enjoyed upward revisions amounting to 50K, bringing the total employment gains for 2015 to 2.65 million.

Lucky Ms. USA, you’d say? Well, not so much. When it comes to Ms.USA (USD) most investors seem to be already accustomed to seeing one impressive U.S. jobs report after another. So, expectations were a bit higher this time around.

The first ever Fed interest rate hike in a decade in December didn’t do much for the US dollar either, as the market had already priced into a rate hike long before it actually happened.

That is why, despite having a much stronger economy comparing to JPY, Ms. USA was not able to keep up with the Yen strength last week, when the Chinese shock happened.

3- Coming Up on the Economic Calendar

China is due to publish their trade balance on Wednesday during the Asian session. With China dumping its problems on the global markets over and over again, investors will be on the watch for this data as well, because export demand impacts production and prices at domestic manufacturers.

A worse than expected outcome could hint that the worse ain’t over yet and China is here to terrify the investors. That would keep Ms. Japanese Yen as the Asian go-to currency, making it as strong as superman.

As for USD, although Ms. USA normally tends to benefit from risk-off flows, it looks like her safe-haven appeal is being diminished since the U.S. stock market hasn’t been immune from China’s shocks.

 4- Technically Speaking

Falling way below the Ichimoku cloud, the USD/JPY pair (along with GBP/JPY, AUD/JPY and other Yen crosses) took a break from a free fall on Monday. Most JPY crosses started the correction at important support levels. In USD/JPY case, it’s the 116 level, which has been tested three times since 2014, and falls right on 38% Fibonacci retracement level.

If this support turns out to be strong enough to keep the pair from falling, and considering the fundamentals mentions above, we could see the pair range between 116 and 120 for a while before finding a new direction.

However a break below 116 could signal a reversal, with 113.50 (50% Fibonacci) as first alternative target. Resistance is now at previous support, at 121.50.

Investing Strategy

If you think this is it for USD/JPY and the pair has finally bottomed out, it could be a good time to get into a bullish position, targeting 120. However, make sure NOT to get into any other JPY cross positions as the market is still too fragile and a direction has not been confirmed yet.

In fact, considering the fundamentals of the US, trading the Japanese yen versus a commodity currency such as AUD or NZD could also make sense, because another Chinese shock would really bring them down to their knees versus the JPY. For that scenario, I would consider a bearish position in AUD/JPY, GBP/JPY or NZD/JPY. I’d also recommend waiting till Wednesday before making a decision.

In any case, set your stop loss and profit targets a little loose from the below levels, because the naughty currency pairs sometimes change their mind right before a psychological level just to piss the forex trading crowd off. This technique helps you avoid getting kicked out of your trading position prematurely.

Here are the recommended supports and resistance levels* for short term USD/JPY forex trading strategies:

Support Levels Turning Point Resistance Levels
116.50 118.50 120
113.50 120 121.50

*Important Note: The support and resistance levels are not suitable for all traders and largely depend on your account size, margin and leverage. Book a private lesson to learn how to personalize your account based on our trading guide.