The U.S. dollar/Japenese yen (USD/JPY) has served as a perfect microcosm of the forex market as a whole over the past few weeks: volatility has gradually receded, causing the pair to consolidate in a tighter and tighter range and sapping the market’s patience. Now, traders have reached a state of apathy on the pair as today’s reaction to the announcement of Prime Minister Shinzo Abe’s “Third Arrow” shows.
In today’s Asian session, Abe unveiled the second iteration of structural economic reforms aimed at stoking long-term growth. These changes include a cut to the corporate tax rate and reform of restrictive bureaucratic regulations in employment rules and health care, among others. While the plan also involved some incentives to encourage women to work full-time, some analysts argue that the plan does not go far enough to expand the shrinking workforce in Japan.
After the first two “arrows” of his plan (massive quantitative easing and broad public works spending) were generally well-received, traders were optimistic that the new package of reforms would wake the USD/JPY from its slumber. Unfortunately, the pair saw almost no reaction to the announcement, underscoring the market’s lack of interest in them.
On the bright side for USD/JPY traders, volatility tends to be cyclical, so periods of high volatility often follow periods of subdued price movement. With volatility plumping extremely low levels as we go to press, a major breakout could emerge later this week.
Technical View: USDJPY
The chart supports the fundamental outlook. The most striking feature on the USD/JPY’s 4hr chart is the large symmetrical triangle pattern. For three weeks now, the unit has been putting in lower highs and higher lows, a graphic representation of the declining volatility highlighted above. Furthermore, the RSI indicator is also carving out a corresponding symmetrical triangle; a breakout from the RSI’s triangle could serve as a valuable leading/confirming indication of a breakout in the USD/JPY exchange rate itself.
While it is notoriously difficult to predict whether we’ll see a bullish or bearish break from here, the pattern does suggest a strong, consistent move in the direction of the breakout. If we see a bullish breakout later this week, the measured move target projection comes in around the 2.5-month high at 103.00.
On the other hand, a bearish breakdown could quickly take the pair back toward the 2014 lows in the 100.75-101.00 range. Either way, traders who have been lulled to sleep by the USD/JPY’s price action over the past few weeks should be prepared for a possible tradable move.