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Is this USD/JPY bounce for real? Unlikely, says Elliott Waves theory

on Jan 6, 2023
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  • USD/JPY rallied more than 400 pips from the recent lows
  • The exchange rate reacted to the 38.2% retracement level
  • It is unlikely that a bottom is in place as the pair needs to consolidate more around 130

The Japanese yen’s (JPY) weakness was one of the major themes of 2022. After breaking above 116, the exchange rate reached 150 before correcting due to the Bank of Japan’s intervention.

Any trader should be aware of central banks intervening in the FX market. Not all of them admit it, but they do, and they often pick a specific timing so that the impact of their intervention is as big as possible.

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So did the Bank of Japan.

First, it intervened directly in the FX market by selling USD and buying JPY. Second, it allowed yields to rise, thus altering its yield curve control policy. It did so around Christmas when liquidity was thin, and the market impact the biggest.

Therefore, the quick decline in the USD/JPY exchange rate from above 150 to below 130 is understandable. The big question is, where will the USD/JPY go from here?

USD/JPY bouncing from 38.2% retracement

The new trading year started with JPY pairs rallying. For example, the USD/JPY rallied from the 129.50 area to above 134 before today’s NFP report came out.

The 400+ pips rally in just a few days tells us that the volatility on the JPY pairs is far from over. From a technical perspective, the bounce came right in time for Elliott Waves traders, as a 38.2% retracement loomed large.

USD/JPY unlikely to have bottomed

According to the Elliott Waves theory, an impulsive wave has five segments – three impulsive and two corrective. After trading above 150, the USD/JPY started a corrective wave – the 4th wave.

It is unlikely that the bottom is in place because any parts of the 3rd wave should not pierce the 2-4 trendline. Therefore, that rule would be broken if a bottom were in place now.

In other words, the USD/JPY bounce might continue, but the Elliott Waves theory tells us that the market needs more time to consolidate around the 130 level. April or May this year would be appropriate for a bottom.