Japanese Yen Just Saw its Biggest Annual Drop Since 2014: So, What Now?

USDJPY's late-September breakout to record territory is a perfect example of one Elliott wave pattern: the triangle

by Nico Isaac
Updated: January 07, 2022

Throughout Japan, January 1 is the most auspicious day of the calendar year. On that day, called Shogatsu, people clean their homes, cook delicious meals, and awake early to watch the first sunrise of the year.

They also throw Bonenkai, "Year Forgetting Parties," which are meant to shake the Etch-a-Sketch of the last 365 days, clear the stresses and anxieties that attended that year, and start completely fresh.

For those riding trends in Japan's currency -- forex traders, importers/exporters, manufacturers and such -- there may be a similar impulse to hit the reset button on the whole of last year and pretend away what happened. In case you missed it, this chart of the world's second-most heavily traded currency pair, the US Dollar/Japanese Yen, summarizes exactly what some yen heads would like to forget:

In late September, the USDJPY broke out of a multi-month-long holding pattern, propelling the dollar to a five-year high and the yen, conversely, plunging to 5-year lows.

In fact, according to one January 5 Yahoo! Finance article, the "yen's tumble is even worse than it looks."

The piece goes on to explain:

"The yen's slump to a five-year low against the dollar this week has seized the attention of financial markets, and the dramatic headlines didn't even capture the full extent of its weakness.

"The currency also slid to a record low based on a JPMorgan Chase & Co. index that measures it against those of Japan's major trading partners and is adjusted for inflation."

Okay but the question for traders isn't which headlines are dramatic enough to convey the extent of the yen's decline now, it's did those same media platforms anticipate the yen's fall then, at the start of its sell-off?

And the answer to that is, mostly no.

After USD/JPY had spent six months between March and September 2021 mired in a sideways trend, mainstream FX analysts couldn't make heads or tails of the yen. Here, these headlines from the time capture the conflicting outlooks for the currency's future:

• "Yen Seen Getting a Boost as Japan Political Uncertainties Mount (Sept. 5 Bloomberg)
• "BofA Warns of Weaker, More-Volatile Yen on Japan Political Risks" (Aug. 30 Bloomberg)
• "The combination of the pandemic, economic headwinds, and tense relations with China could pull the yen in two directions." (Sept. 14 South China Morning Post)

Per "fundamental" analysis, the yen's persistent lack of direction was a non-starter. But for Elliott wave analysis, it was the perfect start for a long-term bullish forecast for the USDJPY.

On September 21, our Currency Pro Service editors looked on USDJPY's price chart and suddenly the nature of the pair's relentless rangebound non-action became clear as water; namely, an Elliott wave contracting triangle was underway.

Here is a diagram of the contracting triangle, defined as:

This pattern is a patience-trying, sideways, corrective move labeled A B C D E. Once complete, you can count on price to thrust to a new extreme. Elliotticians refer to the move following a triangle as a thrust.

On September 21, Currency Pro Service showed this USDJPY chart, which identified the end of the triangle and start of a powerful thrust that would send the dollar soaring and yen sliding to multi-year levels.

"From 109.11 or not much below USDJPY should stage a strong advance that exceeds 111.66, at least."

From there, USDJPY followed its triangle script to a T -- as in, "t" for thrust! And, after an annual loss of 10%, this January 3, 2022, Bloomberg sets a hopeful tone for the yen's future:

"Yen Bulls See Turning Point After Biggest Annual Drop Since 2014."

Right now, our Currency Pro Service presents labeled price charts and in-depth analysis revealing if, and when that turning point will occur.