USDJPY Running Out of Steam as Extremes Are Not Meant to Last

Talking Points:

• It’s quite rare for the USDJPY to gain or decline for more than 6 consecutive weeks
• A negative divergence in the pair’s persistent runs has developed over the two years
• Download the Consecutive Bars Indicator to see these same runs on the Tradestation Marketscope 2.0 platform for free, here

Between 2005 and 2012, it was a rare event to see USDJPY rally or tumble for more than six consecutive weeks. Since the pair started its incredible run from record lows, however, these instances have grown more dramatic. Runs of such remarkable consistency represent exceptionally strong trends, but the more mature these moves are, the greater the likelihood that a correction (be it small or large) is going to occur. Using the DailyFX Consecutive Bars App we find that a record breaking 11-consecutive week run formed in the lead up to the Bank of Japan’s open-ended stimulus program (introduced April 4, 2013). Since then though, the bullish drive has come in shorter and shorter waves.

A divergence in the consistency of the USDJPY’s rallies does not necessarily indicate that a reversal is at hand (this is a weekly chart, so timing needs to account for the periodicity at the very least). Given the proper fundamentals and speculative appetite, the pair can continue its advance; but its progress would likely be more measured.

Looking at the 1Q 2015 forecasts for the US Dollar and Japanese Yen produced by the DailyFX Analysts, the long-term bull trend does find significant support. However, as bullish appetite dries up; the chance of a rebalancing grows. In fact, after the 11 consecutive week rally through 11/10/2012 and the 8 week rally through 10/26/2013, the USDJPY failed to go to any relative extremes over a period spanning 8 months. When BOJ surprised us with additional stimulus (introduced October 31, 2014) the USDJPY diverted from a rebalancing towards a shorter wave of consecutive gains that lasted 6 weeks. The DailyFX Consecutive Bars App can be used to find extreme movements and we can use past performance to see just how persistent trends are (in this case on a weekly basis).

Weekly Chart Created Using FXCM Tradestation Marketscope 2.0