Here’s what I see on the USD/JPY exchange rate on the monthly chart, and therefore on the long-term.
You can clearly see from this chart that we’re in a “make it or break it” moment.
I don’t mean to be a doomsayer, but it’s worth noting.
The 160 exchange rate level has held steady so far, and it’s the level of maximum weakness for the yen in the last 35 years. In technical analysis, it’s been forming a right-angled triangle in recent months.
We don’t know today whether the 160 level will remain as an insurmountable resistance, but given the way it’s behaving, it seems that at some point, this resistance will no longer be able to contain the exchange rate.
It could result in a false breakout, meaning a minimal upward breach, before falling back below 160. This would be the second-best solution, after the best one, which is to immediately drop below 160.
But if the breakout were to be confirmed, the pattern’s target is 180, a level not seen since 1985.
Exchange rates, as you know, reflect the interest rates in a pair of countries (in this case, Japan and the US), and an exchange rate going to 180 means that the interest rate spread widens, favoring US rates (US rates rise).
So the only way for the BOJ to avoid a rise in the exchange rate is to raise rates, which it does NOT want to do to avoid a potential bear market move in stocks like in August 2024.
The situation in Hormuz is absolutely not helping the BOJ, which is therefore more severely impacted than other nations by this wave of inflation. Japan, a nation that imports everything, has virtually no significant domestic production/production capacity, whether for industrial or agricultural raw materials.
If we look at the COT (Commitment of Traders), or how institutional investors are positioned, we see that they are MAXIMUM short on the inverse exchange rate (we look at the USD/JPY chart, which is 160, but futures are JPY/USD, i.e., inverse—so the chart I show is bullish, while the futures chart is a mirror image, but bearish, and therefore consistent with institutional investors being maxi-short, meaning they expect continued weakness in the yen).
This situation is called “make it or break it” because we’re approaching a critical moment. Seeing that institutional investors are extremely short on the exchange rate is evidence of this.
This positioning is therefore explosive in both directions. If the yen strengthens, institutional investors will have to close quickly, driving the yen from 160 to 150 in a very short time.
If, however, the yen breaks 160, we will most likely see other players who, not believing in the possibility of a breakout, will have to close their shorts and buy, causing the exchange rate to rise sharply (similar to the downside just described) well above 160.
I therefore advise you to watch how the exchange rate moves and keep your ears to the east for news coming from Japan.
It’s as if a bottle is about to be uncorked…
This situation is called “make it or break it” because we’re approaching a critical moment. Seeing that institutional investors are extremely short on the exchange rate is evidence of this.
This positioning is therefore explosive in both directions. If the yen strengthens, institutional investors will have to close quickly, driving the yen from 160 to 150 in a very short time.
If, however, the yen breaks 160, we will most likely see other players who, not believing in the possibility of a breakout, will have to close their shorts and buy, causing the exchange rate to rise sharply (similar to the downside just described) well above 160.
I therefore advise you to watch how the exchange rate moves and keep your ears to the east for news coming from Japan.
It’s as if a bottle is about to be uncorked…
