The USDJPY pair flirts again with the 100 level. After it appeared that it left the pivotal level behind, it kept falling in the last four years, recently reaching as low as 101.18 in March 2020 when the stock markets around the world collapsed.
Truth be said, the USDJPY is a unique pair in the FX space. It expresses the differences between two safe-haven currencies – the USD and the JPY. More precisely, when things go bad in the world, the JPY strengthens, and the USDJPY pair falls. In the last four years or so, think of all the U.S.-China trade deal frictions, the North Korean missile launches, and so on. There is always something bad in the world and the market focuses on it.
Yet, when things go from bad to worse, the USD, the world’s reserve currency, appreciates. When there is no USD liquidity anymore, as it was the case in March last year, the market participants turn their attention to the USD. So the USDJPY jumped on the initial pandemic fears, only to retrace most of that move in the ten months that followed.
Bank of Japan Likely to Express Concerns at the 100 Level
Round numbers typically have a psychological role both for traders and for policymakers. In this case, 100 is a huge level for the USDJPY pair.
The first time the pair crossed above it after the Bank of Japan initiated the quantitative easing program several years ago, the event marked the market. The pair formed an ascending triangle, building energy to break higher, and when it did it gapped higher, triggering stops after stops.
Coincidence or not, the current “meltdown” we see in the pair resembles that triangle. More precisely, the market is unable to break the series of lower highs while it finds support at a horizontal area. This is the definition of a descending triangle – one that forms at the pivotal 100 level.
Another interesting thing is that the JPY strength against the dollar comes at a time of Nikkei 225 index outperforming. In other words, a stronger currency and an even stronger equity market may be cause for concern for the Bank of Japan, should the USDJPY fall below 100.
The battle at the 100 level for the USDJPY pair will be one of the most interesting themes to watch this year. Expect stops to be aligned below and the price action to accelerate should the pair drop that far.