The Dollar-Yen Tests a Critical Level

From the Desk of Ian Culley @IanCulley

What started out as a bearish reversal in the dollar-yen is beginning to look more like a bullish continuation pattern.

Buying the Japanese yen will produce absolute gangbuster returns – at some point. 

But the market’s simply not there yet…

For starters, Japanese stocks are hitting new all-time highs. These new highs support bullish USD/JPY positioning – long dollar, short yen.

Here’s an overlay chart of the Nikkei 225 Index and the dollar-yen pair, highlighting their positive correlation over longer time frames:

The USD/JPY tends to peak and trough in tandem with the Nikkei. 

We can apply the same logic to global equities, as a dollar-yen rally characterizes a true risk-on environment much like the one we’re experiencing now.

So if the Japanese stocks are taking out their  December 1989 highs, why can’t the dollar-yen do the same?

It’s awfully close to its comparable 1990 high of roughly 160.

I don’t want to overthink the Bank of Japan’s messaging or anticipate the Japanese Ministry of Finance’s next move. 

Focusing on the charts always stands as the best course of action.  

Check out the cup and handle forming below the 152 level:

Heaps of selling pressure rests at the former 2022 and 2023 highs, backed by the Japanese central bank. It’s a dicey level to trade against.

Nevertheless, a break above 152 triggers an irrefutable buy signal. Whether we choose to take it is beside the fact.

A decisive daily close above those former highs sets an initial target of approximately 158.75 (near the 1990 high) and a secondary objective of 167.

I imagine the kiwi-yen cross is re-completing its breakout if the dollar-yen is resolving higher. But the last week’s short yen trades aren’t working – not yet.

Of course, the former resistance levels highlighted last week and today could prove excellent areas to trade against from the short side.

The long Japanese yen trade will finally work in that scenario. 

But what type of market environment will accompany investors dumping dollars for yen? 

It doesn’t sound bullish for global equities. 

Yet “bullish” is the best description of stocks no matter where you look.

If all-time highs remain the trend for stocks, perhaps it’s just a matter of time before the dollar-yen follows suit.

Am I tempting fate by buying the USD/JPY above 152?

Or do you think this carry trade has legs?

-Ian

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