The Fed’s current rate-hiking cycle is the most aggressive we’ve seen in decades…
Although this is bad news for our domestic purchasing power, it’s good news for foreign exchange.
Currently, the U.S. dollar index (DXY) is up over 17% this year. Many currencies have now reached extreme levels against the dollar.
For example, the Great British pound sunk to a new all-time low in September, while the euro reached parity with the dollar back in July.
However, the weakest major currency has been the Japanese yen. Like many of its peers, the yen has underperformed relative to the dollar.
Just recently, the yen reached a 32-year low. And on a year-to-date basis, the yen is down around 27% against the dollar.
But there are signs this trend may soon come to an end…
Breaking a Trend
One possible reason for this is that the Bank of Japan has finally decided to come to its currency’s rescue by buying billions of dollars’ worth of yen. Another reason has to do with technical analysis…
Let’s check out a price chart of the U.S. dollar and Japanese yen currency pair (USD/JPY) so I can show you what I see…
There are two important things going on in this price chart…
First, notice the trend marked by the blue lines. Once I have three points of contact, I can draw this channel.
In the case of USD/JPY, I first drew a line connecting points 1 and 3. Then, I took a parallel of that line and pulled it to point 2.
Channels are a crucial part of my technical analysis process. The upper boundary line of a parallel channel is a very high-probability target.
Sometimes, like in the case of USD/JPY, the market will break slightly on top of the channel. This is known as a “throw-over.”
If the market continues to accelerate out of the channel, then we can expect further upside. On the other hand, if the market crashes back into the channel after “throwing-over,” then we can usually expect a dramatic reversal.
The second important feature of this price chart is the mathematical relationship between moves 1-2 and 3-4. They’re almost identical to one another. I’ve visually illustrated this relationship using the red arrows on the chart.
When two moves are equal within a parallel channel, it increases the odds of us getting a dramatic reversal.
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History Shows Profit Potential
You can check out how this same setup played out in USD/JPY back in 2020…
After the 2-4 movement completed, we eventually saw an explosive breakout higher.
Now I can’t guarantee the same move will happen again. We’ll have to wait and see which way this currency pair is going to break…
But either way, there’s going to be some great trade setups taking shape.
Just yesterday, I helped my subscribers book profits on a Great British pound (GBP) and U.S. dollar (USD) currency trade. There will be more winners to come. Stay tuned.
Happy trading,
Imre Gams
Analyst, Market Minute
Reader Mailbag
Do you think the Japanese yen has the potential to rise in value against the U.S. dollar in the coming year?
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