Out of all the major currency pairs, the USD/JPY has undoubtedly been one of the dullest thus far this year. The pair has been trapped within a tight range from roughly 101.00 to 104.00 since mid-January, driving the average weekly range (ATR) to levels not seen since before the introduction of Abenomics in Q3 2012. Just when traders thought it couldn’t get any worse, bears began stepping in at lower and lower levels, and starting in Q2 of this year, the unit has been trapped within a tighter range from 101.00 to 102.70.
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. Traders have gone from excitement with the pair’s volatility, to patiently waiting for a breakout, to outright apathy and disgust with the low volatility as we go to press. While we can appreciate readers’ skepticism, the historically low volatility suggests we could see a breakout and more volatility in the near future.
As we noted above, there are growing signs that the bears may be gaining the upper hand. Rates have now put in four major lower highs since the New Year’s Day peak above 105.00. With strong support still emerging around 101.00, the price action over the first seven months of the year has created the textbook descending triangle pattern. In general, these patterns show growing selling pressure and typically break to the downside, but prudent traders may prefer to wait for a confirmed breakout before trading off the pattern.
In a similar vein, USD/JPY’s daily RSI has formed its own corresponding descending triangle pattern with support at the 36 level. A break in the indicator’s pattern could serve as a valuable leading (or at least confirming) signal for a break in price itself.
If we do see a downside breakout in the next week or two, bears will look to target key psychological support at 100.00 next, followed by the 50% Fibonacci retracement of the H2 2013 rally at 99.60 (not shown). Alternatively, a bullish breakout above the descending trend line could expose the 3-month high around 102.70, or even the top of the 6-month range at 104.00 next.