The yen has been in a weakening trend against the dollar since October 2011 (USDJPY has been rising). On June 24 I advised staying out of this market amid a choppy sideways trend, the kind of environment that eats antsy traders for lunch but creates big opportunities for those who are patient. In the past two weeks, USDJPY confirmed key technical support and the chart is showing an attractive reward-to-risk scenario to position for further yen weakness.
The sideways trend since the beginning of the year shows a floor just above 101. Price tested that floor in mid-July and bounced. Keep in mind the larger context is that USDJPY is in a cyclical bull market, so respecting a floor after a short-term decline looks constructive.
Concurrently, momentum shows a bullish pattern. The fast and slow moving averages of the relative strength index has stabilized around the 50 midpoint line. This often precedes a resumption of a larger uptrend after a short-term consolidation or pullback.
The currency pair does face trendline resistance around 105 drawn from the peak in 1998. But that still leaves some upside potential from the current level. And with the cyclical trend up, that resistance level could end up failing.
If you were to go short FXY (CurrencyShares Japanese Yen) and place a stop loss above the highs of its recent consolidation, you’d be looking at risk of around 1.5%. That’s a pretty comfortable position relative to the possibility of the larger weakening trend in the yen extending in the intermediate term.
Good trading, everyone.
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