The Japanese yen recently has awakened from its seven-month slumber below the 80-handle after making fresh post-World-War-II lows at 75.50 in 2011. The USD/JPY held below a long-standing trendline dating back to the July 2007 highs above 123 before finally breaching this barrier in early February. The move suggests that a significant low may have been put in place and the outlook is now weighted to the topside.
Year-to-date the yen has fallen more than 5.7% against the greenback as improving dollar prospects, the re-emergence of the carry trade in late 2011 and continued concerns about further currency interventions from the Japanese Finance Ministry put on downside pressure. The breach of a four-and-a-half-year-long trendline is girded by other key technical factors that support our bias. The yen’s rally in February was the largest since December 2009 with the 20-day rate of change as of March 2 at its highest level since February 2009. At that time, the USD/JPY posted its largest rally of the year, taking the exchange rate nearly 13% higher through April. A high rate of change further supports our bias as it is typical of trends that are near their middle rather than their terminus.
If the 2011 highs at 85.50, the next upside target, are overcome, the USD/JPY will have held the 2011 lows and broken the high of that same year, a classic technical indication of a clear break of the previous downtrend. As such, this will remain our primary target in the medium-term, with a breach above this level eyeing subsequent topside targets at the 100% Fibonacci extension taken from the February 1st and 28th troughs at 85.65, the 161.8% extension just above the 89-handle, and the 261.8% extension at 94.75.
Michael Boutros is a currency strategist at DailyFX.