Descending Triangle Highlights Yen’s Short-Term Prospects

USD/JPY News and Analysis

Disappointing Chinese data, Guangzhou district lockdowns weigh on risk sentiment
Yen performance may prove short-lived despite bearish triangle as the 145 psych level holds firm for now. Carry trade dynamics remain strong as the Fed continues to hike
US CPI and Michigan consumer sentiment data up next with Japan GDP next week

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Disappointing Chinese Data, Guangzhou District Lockdowns Weigh on Risk Sentiment

News of anther district lockdown in the major manufacturing hub on Guangzhou has added to the recent decline in risk sentiment after the crypto world experienced another ‘shock’ as Binance announced its intention to take over rival crypto exchange FTX amid mass liquidity shortages subject to due diligence.

Overnight, it appears that the Japanese Yen was the main beneficiary of recent developments as it emerged the top forex performer in the early hours of the morning, with the NZD underperforming – possibly in reaction to the negative news accruing in China. A weaker dollar coupled with a volatile crypto market has also spurred gains in gold – an asset, much like the yen, which is viewed as a safe haven. Earlier this morning Chinese CPI missed estimates of 2.4%, printing at 2.1%, underscoring threats of deflation as the nation continues to prioritize its zero-COVID policy over economic growth.

Currency Performance Chart Overnight

Source: FinancialJuice,

The short-term decline of the USD/JPY forex pair is not surprising, given the recent dollar and US 10 year treasury declines. Markets are pricing in a lower rate hike for December (50 bs vs 75 bps) after Jerome Powell communicated that at some point it will become appropriate to slow the pace of rate hikes. The market viewed this as an opportunity to somewhat deflate the long dollar trade which has seen lower moves in USD/JPY.

of clients are net long.

of clients are net short.

Change in	Longs	Shorts	OI
Daily	0%	-3%	-2%
Weekly	-4%	-5%	-5%

Yen Performance May Prove to be Short-Lived Amid Significant Support

USD/JPY trades a little over 4% lower from the most recent FX intervention efforts executed by Japan’s Ministry of Finance on Friday the 21st of October after Asian and European traders had already headed home. Previous efforts to lower USD/JPY forex valuations received little follow through, however, this time around there appears to be more bang for Beijing’s buck – helped by a weaker USD.

On the daily chart a descending triangle appears, although this pattern is usually observed within the context of a broader downtrend and not an uptrend as has been the case. Nevertheless, a break below the pattern around 145.20/00 may indicate the potential to trade lower, something the MACD indicator suggests is possible.

In the meantime, USD/JPY reveals considerable support standing in the way of a move lower. The 50 SMA, 145 psychological level and unconvincing fundamentals suggest that USD/JPY may remain supported for longer. It appears that shorter-term drivers of the yen are just that, short-term, and a reversal of the carry trade remains a way off as the Fed intends to hike rates to 5% early next year – widening the interest rate differential between the two nations.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

The 4-hour chart reveals the significance of the 145 level which has acted as resistance, and support in more recent times. In addition, the presence of those extended lower wicks over the last few candles suggest a reluctance to trade lower in the absence of a catalyst.

USD/JPY 4-Hour Chart

Source: TradingView, prepared by Richard Snow

Major event risk this week focuses on US CPI – which is forecast to remain elevated despite a 0.2% drop expected year-on-year. On Friday we have the Michigan consumer sentiment report which will be interesting to read after the ‘state of the economy’ was identified as the main issue facing those who intended to vote in yesterday’s US midterm elections.