Chart of the Day: Yen Set To Strengthen Despite Japan’s Economic Contraction

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JPY Daily Chart


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Despite Japan’s economy worsening for the first time in six years, the is strengthening. The Cabinet Office’s coincident index of business conditions fell 0.9 point in April from March to 99.6, falling below the 100 base. This is the key composite index of economic indicators, and it’s reinforcing the view that the country’s economy has entered a recession.

The timing couldn’t be worse, as the downbeat figures come ahead of a 2% consumption tax hike to 10% in October, which is likely to hit consumer spending and thereby further slow the economy.

With a barrage of headwinds, investors are buying the yen for its safe-haven status, putting aside the outlook for the Japanese economy.

China’s economy is losing steam even ahead of the escalation of trade risk, Europe’s struggles to remain out of a contraction, and the uncertainty of the path to tightening of U.S. interest rates. All together, this makes for a very hazy macro outlook—not to mention other risks stemming from Brexit, Iran and North Korea.

The USD/JPY pair completed a double top on Monday, when the price fell below the March 22 low. The price’s inability to maintain the rally past the early March highs was the first sign that something is wrong with the uptrend. Then, the price fell below the major MAs, till it finally fell below the March lows, completing the pattern.

The MACD and RSI completed similar patterns, and the 200 DMA sent the 50 DMA packing when it tried to scale higher to trigger a golden cross. Finally, today, the pair found resistance by the neckline below 110.00. All in all, it enhances the case for a dollar-yen reversal.

Trading Strategies

Conservative traders should wait for a deeper penetration into downtrend territory, testing the 108.49, Jan. 31 trough. Then, they’d hold on for a potential return move to retest the integrity of the pattern, with at least one long, red candle engulfing a green or small candle of any color.

Moderate traders may wait for the deeper breakout as well as for the expected pullback toward the neckline, but not necessarily for proof of a reversal; rather for an entry closer to resistance, to limit exposure.

Aggressive traders may short now, provided they understand and accept the risk, managed with a comprehensive trade plan that fits their equity.

Trade Sample

Entry: 109.50

Stop-Loss: 110.00

Risk: 50 pips

Target: 108

Reward: 150 pips

Risk-Reward Ratio: 1:3





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