By Vincent Cignarella is an FX strategist who writes for Bloomberg
The Japanese yen is becoming more and more of a proxy for the Trump trade. If that’s true, dollar bulls better keep bailing.
Since the beginning of the year, the yen has nearly halved its post-election losses and has broken several major resistance levels. This is a signal the currency has momentum. If the dollar drops another leg -- a trading term for a short-term trend - it could be a sign that the Trump-inspired rally is over.
The sale of foreign bonds and the repatriation of funds to Japan has helped drive the almost 7 percent slide in the dollar against the yen since the November election.
Demand for yen has been driven by weekly foreign bond sales and dollar sellers have capped every major rally, according to traders in Asia. That has pushed dollar-yen through its 50-day moving average, the top of the Ichimoku cloud and key support around 112 yen. Several technical indicators show the next support at 110 yen may break.
The meeting between Japan’s Prime Minister Shinzo Abe and President Donald Trump on Thursday may also fuel more dollar weakness. Japan has one of the largest trade gaps with the U.S. that widened to almost $69 billion in December. Last week, the president singled out China, Japan and Germany for devaluing their currencies to gain a trading advantage.
Any mention by Trump that the yen is undervalued, similar to recent comments by administration officials about the euro, could be enough to spark the dollar’s next leg lower.
Technicals
- The latest dollar slide points to a test of 109.90 yen, the base of the current Ichimoku cloud. A sustained break would trigger a major capitulation for technical traders and may catch fundamental investors who had bet on the stronger dollar since the election.
- The dollar is testing 111.99 yen, the 38.2 percent Fibonacci retracement from post-election lows to highs. A sustained break opens the path toward 109.93 yen, 50 percent retracement of the pattern.
- Elliott Wave analysis suggests the dollar may have completed the third wave and is now entering the first wave of a new, lower trend. A close below a minor wave support at 111.60 yen would confirm the move.
Still, a cheaper dollar may make Treasuries more attractive and lead to a reversal of the repatriation flows as we head into the end of the fiscal year, which could lead to the next dollar rally.