A typical and major error of pure fundamental or technical analysis is the 100% use of one of form of analysis with complete disregard for the other, states Ashraf Laidi of AshrafLaidi.com.
Attempting to draw conclusions and forecast on USDJPY by comparing current price and technical patterns to previous decades risks ignoring some vast policy differences. The chart below shows each time USDJPY broke below its 200-DMA, it went on to fall by an average additional decline of 5%. The two exceptions were: in 2013/4 when yen weakness and QE formed the basis of the Three Arrows Policy; and in July 2023 when US-JPN monetary policy paths continued to diverge. The stand-out fundamental factor is the Three Arrows Policy pursued in 2013 by the late PM Shinzo Abe and powerful former BoJ chief Haruhiko Kuroda. You can do a simple Google search about the details and FX implications of Three Arrows. So what will it be this time?
Does the latest re-break below the 200-DMA pave the way for further downside in USDJPY? Regardless of whether the BoJ normalizes (or hints at) normalizing yield curve control at next week's policy meeting, the decision to terminate it in 2024 is inevitable. 2023 will see USDJPY complete its third consecutive year of being the weakest-performing G10 currency. Imagine that…three straight years of being the worst currency. Taking another close look at the above chart will tell you something about a 5% extension below the 200-DMA. This explains our recent use of a "smaller+further" trading strategy for such setups for the WhatsApp Broadcast Group.
I usually tell people what and how we did with the WGP after major events. On Wednesday, the second I saw the Fed Dot Plot called 4.6% FF for 2024 (3 three rate cuts) I jumped on USDJPY short. No, I did not focus on Long AUDUSD or Long EURUSD..it was all Short USDJPY and Long XAUUSD.
Result: Not only "Short USDJPY" was the best combo trade of Wednesday, but of the entire week (USD weakest and JPY strongest).
Learn more about Ashraf Laidi at AshrafLaidi.com