USD/JPY Technical Highlights:
- USD/JPY explodes with one of the larger moves in recent years
- Pent up pressure might mean higher volatility is here to stay
USD/JPY ripped hard yesterday, gaining 1.35% and notching the largest one-day move since August. The question is, is it sustainable? Since the middle of last year one-year realized volatility has been troughing at record lows, making it difficult to believe in any upstarts in volatility.
But now may be changing. Looking at the range over the past three months, when adjusted for volatility and compared to the ranges over the past few years, it ranked as the tightest period of trading since July 2014. That was indeed a very quiet time in FX, and a very important one as USD/JPY, and FX volatility as a whole, broke out hard.
Not always do these initial moves work out to be the intended direction, sometimes they turn into a head-fake before resolving in the direction that becomes sustainable. The extreme narrowing of volatility and breakout just signals that a complacent market is now paying attention and starting to scramble.
With that said, USD/JPY is at an interesting cross-road here, or rather another one. Yesterday’s explosion pushed price beyond the 2015 trend-line, a threshold it had struggled at in recent weeks. This helps carve out a bullish path, but still another hurdle to cross – the top-side trend-line of a triangle pattern.
The declining yen volatility can be seen in the weekly chart. The result of volatility compression has been a triangle formation that suggests a big move is coming. If, on a weekly closing basis, we see USD/JPY break out of the formation then a sizable rally could be underway.
The current vicinity around 11200 is resistance, but the next really sizable resistance doesn’t clock in until around 11400/70, several swing-highs from 2017/18.
What if it turns out to be the false breakout? Well, first we will run with the direction of the breakout (taking it for what it is) and secondarily worry about it reversing. If this is to be the case, then not long after a confirmed breakout we would likely see a swift reversal lower that takes out the bottom of the wedge formation.
In either event, confirmed breakout or swift reversal lower – USD/JPY movement (and FX in general) may be here to stay. Finally.
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USD/JPY Weekly Chart (long-term volatility breakout?)
USD/JPY Chart by TradingView
USD/JPY Daily Chart (broke 2015 trend-line)
USD/JPY Chart by TradingView
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—Written by Paul Robinson, Market Analyst
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