Is the JPY slide over? Investors prepare for further declines

on Jul 6, 2022
  • Weak yen is not a worry for the Bank of Japan
  • A pennant formation suggests more upside
  • 140 may come this summer

2022 turned out to be the year of the JPY pairs breakout. The yen’s depreciation against its peers continues, with many traders seeing the move already as overextended.

But is this a reason to worry?

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Sure enough, the yen declined by more than 20% against the US dollar alone. Furthermore, the slide took place in a short timespan – only in March the USD/JPY traded below 116, and now it trades comfortably above 135.

The rapid depreciation of the Japanese currency led to many investors worrying about the negative impact of the falling currency on the Japanese economy. But the recent Tankan report shows that the side effects are limited overall, suggesting that the Bank of Japan is unlikely to change course and alter its monetary policy anytime soon.

Possible pennant formation hints at more upside

The yen’s decline took a brief pause recently. One month ago, the USD/JPY reached 135 and consolidated ever since.

But the consolidation area looks like a continuation pattern. Ahead of the Non-Farm Payrolls data scheduled for release on Friday, the market appears to consolidate before taking another step higher.

The technical picture does not signal a reversal (yet). A quick look at the price action in 2022 reveals an ascending triangle that took about six months to form before the market broke higher.

One may say that the 116 area was decisive. By the time the market moved above, it did not stop until 130, where it had met resistance.

Once resistance was overtaken, it became support. As such, the price bounced from the pivotal area the first time it was tested, reacting at horizontal support.

July is full of important economic events. The Federal Reserve of the United States is expected to raise the federal funds rate by at least 50bp and will likely raise it by 75bp.

In its efforts to fight rising inflation, it widens the gap with other central banks when it comes to the interest rate level. In the case of the Bank of Japan, it has no reason to raise the rate, and, in fact, it keeps easing the monetary policy.

Therefore, the yen’s slide will likely continue, and the chances are that the current consolidation is nothing but a continuation pattern. All in all, expect the pair to try to move above 140 on a hawkish Fed and a Bank of Japan that is unlikely to change the course of its easy monetary policy.

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