We addressed the advance in the yen a few weeks ago as risk-off sentiment pervaded the markets. The reflation trade had been deflated by the Trump administration’s setback regarding healthcare reform. Markets, more significantly, further questioned the Fed, the supposed ‘dovish hike’ and their desire to increase interest rates at least three times this year. A classic risk-off move ensued with the big dollar dropping below 100 on the DXY index, commodity dollar currencies weakening and gold being bought.
However, since the end of March the dollar has slowly climbed, bouncing off the widely watched 200 day moving average. Markets have slowly realised that the Fed is in gradual hiking mode and President Trump lives to tweet another day about his other fiscal plans, like tax and infrastructure.
In this light, it is prudent to ask if the yen strength which we have seen over this period has now abated. For this, we like looking at crosses like EUR/JPY and AUD/JPY which clearly shows these recent moves.
EUR/JPY Daily Candle Chart
EUR/JPY bumped up against strong resistance in the 1.2300 area in December and January. They failed again to reach this level when the Fed hiked rates as expected at their March meeting and dropped to near-term support in the 118.00 zone.
We can see the makings of a strong reversal pattern in this pair– a bullish ‘hammer candle’. This candlestick signal has a long lower shadow and little or no upper shadow. We therefore now need to see further upside follow through in the form of a long blue candlestick or preferably a gap up, and this should definitely be seen within one to three days.
AUD/JPY Daily Candle Chart
Similarly AUD/JPY, the classic ‘risk-on’ pair topped above 88.00 before declining after the Fed hike. There is now a potential ‘false break’ around the support level at 83.50.
Going forward, we look to the FOMC minutes to guide us for direction in determining if these moves are a simple retracement in a medium-term downtrend or the end of yen strength for the near future.