In the forex market, we quote the exchange rate between the U.S. dollar and Japanese yen as “how many yen buy one dollar.” That’s why the standard, tradable, forex pair is known as USD/JPY and not JPY/USD.
When the USD/JPY chart shows a downtrend it means the yen is strengthening. When the chart reflects an uptrend, the yen is weakening.
Now, as you can see on the chart below, there are three things that tell us the yen’s rise is over.
1) The yen has strengthened against the dollar since late 2007. The wedge-shaped channel shows this multi-year downtrend in the USD/JPY pair.
2) The USD/JPY put together four consecutive up weeks, breaking above major downtrend lines in the process. The Relative Strength Index (RSI) confirmed the upside break when it made higher lows and higher highs as the USD/JPY bottomed out between August and February. This is bullish divergence. It suggests the USD/JPY will go higher.
3) So, establish a target for the next price move, which will, at least, retrace a portion of the USD/JPY downtrend from ¥123 to ¥75. Fibonacci retracement levels, a common technique used to measure and forecast the size of price moves, of 50% and 61.8% provide a good guide.
Bottom line: watch for the yen to drop to ¥100 – ¥105 against the dollar.
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