USD/JPY: How to Spot Trend Despite Volatility

From 32-year high to 8-month low and up again – the USD/JPY’s wild ride continues. We’re ready for where it goes next.

by Nico Isaac
Updated: May 11, 2023

My family and I recently took a trip to the primitive seaside destination known as Cumberland Island, Georgia. This place is unlike anywhere I've ever been. An island jungle overgrown by hundred-foot-tall oaks covered in shawls of Spanish moss, freely roaming wild horses and their suckling foals, and the crumbled ruins of mansions once owned by the steel-magnate Carnegie family.

One evening I was strolling the beach, and an amazing photo opportunity arose. I put the timer on my camera, stepped back into the shot, and took a selfie.

I immediately posted it to social media. Hashtag #dreamvacation. What my friends saw was me, smiling widely in the foreground, and the amber rays of a setting sun illuminating the silhouettes of two gorgeous stallions in the backdrop. It was picture perfect.

What my friends did NOT see was the fact that as I stepped backwards into the totally staged, "candid" shot, I walked right into a steaming pile of freshly deposited horse manure, and four seconds after taking the picture, the stallions 30 feet behind me started fighting in a violent show of alpha dominance.

Let's face it. Pictures, especially the ones we see on social media, are rarely an honest depiction of reality. There's a whole lot the viewer doesn't see when they press that "like" button.

It's also true of the picture traders and investors see from the professional economic shutterbugs. I'm talking mostly about the shots taken with the "fundamental" filter, that show a market's trend being driven by any number of external news "catalysts." On its face, this picture seems true. But there's a lot not being shown behind the scenes that is truly driving prices.

A recent example of this comes from one of the planet's most heavily traded currency pairs, the U.S. Dollar/Japanese Yen. In October 2022, the USD/JPY stood at its highest level since 1990. (That means the greenback stood at a 32-year high against the yen.)

At the time, the mainstream picture of the USDJPY was clear: The historic rally would continue amidst a persistent standoff between government intervention and ultraloose policy, and by proxy, an attempt to balance a local increase in living costs with a resurgence in tourism to Japan after the pandemic.

From Japan Times on October 6, 2022:

"Yen's pain is far from over and poised for worst year since 1970, poll shows.

"USD/JPY's uptrend unlikely to reverse as it is supported by U.S.-Japan policy gap and balance of payment deficit, while intervention was unilateral... The determination of the BOJ to maintain its ultra-loose monetary stance through yield curve control has been a clear signal for selling the yen.

"It is hard to see a turn in USD/JPY now even after intervention by the MOF. The Fed and global central banks have more tightening to do while the BOJ does nothing but ease."

And yet, behind the "fundamental" picture of a perpetually falling yen vs. dollar, we saw a whole different set of events playing out. On October 28, our Currency Pro Service showed this chart of the USD/JPY:

There, we identified a clear, five-wave impulse complete from the January 2021 low. For newbies, there's the definitive beginner's guide to all things Elliott, the Elliott Wave Principle -- Key to Market Behavior, with this introduction to the essential Elliott motive wave design:

"The market's progression unfolds in waves....progress ultimately takes the form of 5 waves...

"There are two modes of wave development: motive and corrective. Motive waves have a 5-wave structures, while corrective waves have a 3-wave structure or variation thereof...

With five waves up and done, an October 28, 2022 Currency Pro Service update developed this picture of what's to come:

"Bearish reversal underway from 151.95. Trading back into the corrective price channel on the monthly chart and breaking down from the impulse channel on the weekly chart is the bear's next objective."

And from there, the USD/JPY's rally came to a screaching halt. The pair reversed course, falling into an 8 month low near 130 into January.

At that point, the preferred wave picture continued to be bearish, but on February 6, our Currency Pro Service showed this alternate wave count for the USD/JPY which called for a wave 2 rebound off the recent lows:

The USD/JPY indeed followed its alternate Elliott wave scenario and rose to near 140, as this updated chart from a May 2 Currency Pro Service update shows:

Right now, the May 2 Currency Pro Service weekly price chart of the USD/JPY reveals how high the current rally leg could go, and what price level to watch to indicate the upside has been met.

Of course, trading is risky and not all Elliott wave interpretations correctly anticipate price direction. But when you follow the pattern of trader psychology, the subjective falls away and the objective emerges.