The U.S. Dollar Vs. the Yen: The Prodigal Bear Returns… But For How Long?

In mid-July, all "fundamental" signs said the USDJPY would "continue to defy gravity." Famous Last Words!

by Nico Isaac
Updated: August 05, 2022

For the last 2 weeks, I've been binge-watching one of those cringe reality TV shows in which 10 survivalists are dropped into a remote arctic region where the primary inhabitants are mountain lions and 800-pound Grizzly bears to see who the last woman or man standing will be.

In the last episode, one contestant films herself excitedly foraging what she believes to be cow parsnip roots and roasting them over her open campfire. A few hours later, though, she turns the camera back on, looking pale and clammy. She shakily explains that, after coming down with severe nausea, fever and dizziness, the root may have been water hemlock, a poisonous root nearly identical to cow parsnip.

She chews on a lump of toxin-absorbing charcoal and hopes its enough to avoid a much worse outcome. (I won't reveal any spoilers!)

Few of us would make it one day on a show like this. (Personally, I'd tap out after 15 minutes.) But what about the fight for survival in the often brutally volatile terrain of forex markets? Here, traders must use the tools they've been given to identify a market's trend. And to do so incorrectly could have dizzying consequences.

Mainstream analysis uses the "fundamentals" tool of forecasting. It's supposed to work like this: News events and economic data signal whether prices are ripe to rise or fall. But all too often, it leads to trend misidentification.

Take, for instance, the recent performance in the U.S. dollar/Japanese yen forex pair. Since 2022 began, the USDJPY has outperformed every major currency pair, and on July 14, the buck touched its highest level against the yen in the 21^st century.

According to the "fundamental" guidebook, the USDJPY's winning streak would continue to be supported by external forces, leading to a positive bullish I.D., care of the following news items.

July 13 Forex.com:

"USDJPY continues to defy gravity...The conditions for a higher USD/JPY have been perfect. US inflation continues to rise above expectations (and at an alarming rate), whilst the Fed's 50 and forthcoming 75-bp hikes are doing little to dent it.

"But we also have the BOJ fixated on an ultra-loose monetary policy, with both the central bank and government of Japan openly backing a weaker yen."

July 14 Bloomberg:

"Don't fight it, it's not the right time to go against dollar strength yet."

July 12 Daily Forex:

"The environment is vulnerable to dollar buying and yen selling given the sense of security that there will be no turmoil in Japan for a while and amid expectations of a Fed rate hike to combat inflation.

"It wouldn't be surprising if USD/JPY tested 147 or 150 in that direction."

And yet, despite the positive bullish I.D. of the USDJPY's trend by "fundamental" experts, the pair peaked on July 14 and turned down in its first sustained sell-off to 6-week lows in recent memory.

In turn, the mainstream tools left many chewing on the wrong side of the USDJPY opportunitree; indigestion was prolific. But fortunately, there were other ways to identify the pair's price trend: namely, Elliott wave analysis.

On July 16, our Currency Pro Service showed this labeled price chart of the USDJPY, on which analyst Michael Madden identified a textbook Elliott wave diagonal as complete at the recent July 14 high.

The paramount guidebook Elliott Wave Principle -- Key to Market Behavior defines the diagonal as a five-wave motive pattern "in which all the waves are 'threes,' producing an overall count of 3-3-3-3." Most important, diagonals imply one thing: "dramatic reversal ahead."

(Pictured here: Diagonals preceding bearish and bullish reversals)

In the July 16 Currency Pro Service, Michael Madden confirmed the USDJPY's next move out of the diagonal would be down:

"Near-term, we are watching to see if wave 5 is now unfolding as an ending diagonal. Under this current modeling, we can count five waves completed at 139.39.

"Breaking down from the ((ii))-((iv)) boundary in a decisive manner will be bearish evidence."

This next chart shows the sharp sell-off to 6-week lows on August 2 that followed:

Of course, not all Elliott wave forecasts work out like this, and forex trading carries immense risk.

But our Currency Pro Service gives traders a figurative piece of charcoal in the form of critical support and resistance levels to help absorb that risk and spot high-confident "windows of change."

See below to learn more.