Yen May Be Due for a Bigger Strengthening Move

Japan's currency has shown little reaction to official efforts to stop its decline this year. However, past price patterns suggest that a more significant strengthening move may be on the horizon.

Technical analysts often use historical data to predict future prices, and the yen's behavior in previous episodes may be particularly useful here. In these cases, Japanese interventions typically triggered an initial quick jump in the yen's value against the dollar, followed by a slow drift back toward weakness. However, eventually, a much larger yen rally has occurred in many of these past episodes, sometimes catching investors off guard.

The dollar's recovery against the yen from the most recent intervention, which took place at the end of July, has struggled to surpass 159.60 - the midpoint of the latest intervention-driven slide from July's high of 163.99 to a low of 155.20. If the dollar breaks below support at 158, it could open the way for further decline toward 155 and possibly even 152.10, this year's low. A price gap was left on the chart in October at 149, which some traders expect to eventually get filled.

Surprise US Treasury bond buyback plans, which have weakened the dollar broadly, could also contribute to a further decline in the dollar and a strengthening of the yen. On the other hand, if the dollar climbs back above 159.60 and then 160, it would suggest yen weakness toward 164.

One factor that could contribute to this outcome is persistently high oil prices, which tend to hurt the yen. The relationship between oil prices and the yen is complex, but in general, higher oil prices can lead to a stronger dollar and a weaker yen.