Japanese Yen Technical Analysis: USD/JPY Cracks 150.00, What's Next?

Japanese Yen Talking Points:

• USD/JPY traded below the 150.00 level for the first time since early-December.
• Indications continue to stack that the USD may have topped, and with both the USD and USD/JPY setting fresh lows today, the risk is a larger swell of Yen-strength leading into another carry unwind scenario, such as we saw last summer.
• While USD/JPY’s initial reaction to CPI last week was strength, the pair has sold off for five of the six past days, highlighting the shifting dynamic between rate expectations between the U.S. and Japan.

Ever since USD/JPY recovered back above the 150.00 level last October, there hasn’t been much time in the pair below that price. There was the test in early-December, but that was short-lived as bulls quickly came back, helped along by the FOMC meeting in the middle of that month that saw the pair make another run at the 160.00 handle.

But notably, ever since the US Dollar set its current high on January 13^th, USD/JPY has taken on a new trend with a consistent series of lower-lows and highs. Today marks another waypoint along the way, as the pair has put in its first test below the 150.00 level in more than two months.

To be sure, these are difficult moves to chase, but given longer-term proximity to highs, there could be an opening for a continued sell-off, especially if the US Dollar reverts into its prior range.

USD/JPY Daily Chart

USD/JPY Bigger Picture

The big question now is whether we’re at the forefront of another episode of carry unwind. Given the longer-term position of the pair, which remains well-elevated from the sub-103 levels that the trend had started at in early-2021, there’s likely a large remaining long position priced-in here.

Perhaps more important for equity markets, there’s probably a lot of leverage in markets outside of Japan that have been funded by the cheap rates furnished by Japanese banks. This is what led to the de-leveraging event last summer, when global equities began to fall as the USD/JPY carry trade unwound.

For institutions that had borrowed Yen at low rates in Japan and then invested it elsewhere, with a hedged position in USD/JPY, the falling spot rate served as a threat. And like we saw last summer, those positions can come off quickly as a crowded trade begins to unwind.

As is often the case across markets, the big driver is one of expectations, and if we are seeing a backdrop where the USD has topped, and where the Bank of Japan may be hiking rates, the motivation for holding long USD/JPY could continue to go down, and this is a likely culprit behind why USD/JPY is down about 6% from the January high while DXY is down by 3.45%, as of this writing.

Since the start of the carry trade back in 2021, there have been multiple episodes of bearish moves. In both November of 2022 and 2023, we saw stern sell-offs start and that’s even with the rate differential soundly favoring the long side of the pair.

Last summer’s sell-off is when that rate differential started to shift in the other direction, and similarly, this shocked longs as prices dropped by more than 2,000 pips in less than a month.

From the weekly chart below, it appears that another bearish leg has begun as the losses have been consistent with price dipping back-below the 150.00 handle.

USD/JPY Weekly Chart

USD/JPY Near-Term

The breach of 150.00 could be indication that bears are getting more aggressive, but from a strategy standpoint, trader should still treat this cautiously, as there’ve been numerous twists and turns in the saga around USD/JPY over the past four years.

With price now below the 150.00 handle, that becomes a spot of possible lower-high resistance. It would be an aggressive area for bears to hold but if we are, in fact, seeing carry unwind, then longs that have held for the dip below 150.00 could use that as opportunity to get out of the trade after a bounce. If we see sellers holding resistance there, I’d take that as a bearish indication.

A bit-higher is the 38.2% retracement of the recent bounce, and this was a price that had exhibited support on a couple of different occasions. Notably, it hasn’t yet functioned as resistance, so if we do see a spike above 150.00, that price at 151.51 is of interest, as is the 151.95 level lurking above it.

USD/JPY Four-Hour Chart

--- written by James Stanley, Senior Strategist