USDJPY

(analysis as of December 27, 2020)

USDJPY is an interesting market this year as it is experiencing extremely low levels of volatility. Low levels of volatility don’t last forever. Low levels of volatility tend to relinquish to higher levels of volatility over time. Therefore, we may see an explosion of price with USDJPY in 2021 (cited levels towards the end).

First, let’s peek into how low the volatility currently is. Let’s add the Bollinger Bandwidth indicator to the charts. This indicator is a derivative of the Bollinger Bands. For those unfamiliar, BB will calculate the price distribution dependent upon the price's average and measure of volatility. 

I am interested in what it identifies for us regarding volatility of the market. This indicator is calculated by taking the width of the Bollinger bands and returns a figure in pips (or in points if you are measuring it against a stock).

You can use this indicator on a variety of time frames. USDJPY is experiencing EXTREMELY low levels of volatility for the past 20 years!

Here’s the MONTHLY chart with the Bandwidth indicator at the bottom (listed as BBW):

As you can see above, the yellow box illustrates the recent small width of the monthly Bollinger bands…or volatility. I have this indicator using a 20 period moving average. USDJPY came close in 2007 to similar levels of low volatility. In reality, this low level of volatility has been in play since 2018. In essence, the volatility is historically low and is becoming lower in recent months.

Let’s zoom in a little to a weekly chart.

Remember, this indicator is based on the previous 20 candles…in this instance it is a 20-week average of the volatility (which is almost half a year).

Take a look at 2014 (red arrow)…this is the ONLY time USDJPY has experienced smaller BB width than in the current environment. That episode of low volatility led to a spike higher in pricing.

In fact, I see 8 previous episodes when weekly volatility was CLOSE to what we are experiencing now. In 6 of those 8 periods, USDJPY broke higher (green vertical lines are breaks higher). There were 2 instances of low volatility leading to a break lower (see purple vertical lines).

 OK, LOW VOLATILITY…NOW WHAT?

The market will go through periods of low volatility. The good news is that low volatility will not last forever. No matter what the FED, Bank of Japan, or any other government entity…no matter how hard they try to manipulate pricing, low volatility gives way to high volatility.

EURCHF LOW VOLATILITY CHANGING TO HIGH VOLATILITY

If you recall back to Swiss National Bank trying to peg the CHF to the EUR in 2011, this market experienced a suppression of volatility. For nearly 4 years, the volatility was suppressed in the EURCHF exchange rate. Then, all of a sudden, SNB released the peg and the market went crazy. It felt like a REALLY long time when the market was dull and boring.

I am not suggesting that the Bank of Japan is holding the USDJPY exchange rate to a peg. I’m merely making the point that low volatility will give way to increased volatility.

That means someday, we will see increased volatility in USDJPY. That day will likely come when most market participants have given up on following the price! Perhaps it comes in 2021?

USDJPY Elliott Wave

There are a couple of different Elliott Wave counts I am keeping an eye on. The first piece of evidence that is grounding my bias is the rally from 2011-2015. This rally is clearly an impulse wave. This is an impulse wave to start a new trend after a multi-decade low and termination of a bear trend in 2011.

One specific thing that Elliott Wave can identify for us is that when we have an impulse wave to start a new trend, typically two more things tend to happen.

1.      We will see a partial retracement

2.      We will see a continuation of the trend in the original direction (higher) of similar size of Fibonacci proportions

USDJPY WEEKLY IMPULSE PATTERN AND FIBONACCI

As we can see on the image above, the clear impulse wave to start a new trend.

If we apply the Fibonacci retracement tool from the 2011 low up to the 2015 high, you’ll find the 38% retracement level cuts right through wave (4). This is a common relationship in an extended third wave.

This analysis would technically be correct so long as it holds above the 2011 low. I don’t think there will be much lower pricing in this market. If USDJPY does correct lower, there is a previous support looming near 99 and the 61.8% Fibonacci level near 92.

The way I approach this is with a bullish bias and a focus on those levels. So long as pricing remains above 99, then I have a wave count I am focused on. In the unexpected event that USDJPY drops below 99, then there will be another wave count that would have me focus on 92ish as support.

POSSIBLE ELLIOTT WAVE TRIANGLE COUNT

Earlier, I discussed the historically low volatility that we are experiencing. It is common for low levels of volatility to coincide with an Elliott Wave triangle pattern. The good news about a triangle pattern is that they appear in only certain places within the Elliott Wave sequence. The bad news about the triangle pattern is that it can be difficult to determine whether they are bullish or bearish.

In the case for USDJPY, I feel relatively confident eliminating the bearish triangle scenario.  

The price action from April 2019 to April 2020 does not fit very strongly into a bearish triangle that is completed. The double top pattern of two nearly equal highs of April 2019, then February 2020 do not behave like the end of an X-wave triangle.

So, this implies that the triangle IS A LOT BIGGER or another pattern is forming.

As we are experiencing extreme levels of low volatility, I am leaning towards this being a HUGE triangle pattern.

USDJPY BULLISH TRIANGLE SCENARIO

Here is the bullish triangle scenario I am following.

This Elliott wave count suggests that USDJPY completed wave (C) of the triangle at the March 2020 low. This implies we are rallying in wave (D) of the triangle. Though we are still inside this potentially large triangle, wave (D) would likely unfold to near 113…this is about 1000 pips above current pricing.

USDJPY DAILY CHART WITH ELLIOTT WAVE LABELS (TRIANGLE)

Zooming into the daily chart, it appears USDJPY is completing wave B of (D). This dip lower has corrected about 78.6% of the March-April 2020 uptrend. If this wave count is correct, then USDJPY should begin a rally towards 113.

Watch the grey resistance trend line for confirmation of a push higher.

This view is the preferred view so long as USDJPY remains above 101.18. 

In the unlikely event of a correction below 101.18, then it is possible the (C) leg of a triangle is still unfolding or that another pattern is at play. We will address those alternates should price make it down to those levels.

BULLISH USDJPY

Risk: 101.18

Target: 113

Risk to reward ratio: about 1:4 (depending on the entry point)

By the way, this bullish move in USDJPY may drag other xxxJPY crosses higher with it, too!