JPY takes another hit: here’s what to expect next

After a correction that took three weeks, the Japanese yen is taking another hit. The USD/JPY move above 132 marks a 20-year low for the yen, and the bias remains bearish.

Those looking for a reversal are in for a lot of pain, as the Japanese yen’s collapse is nothing short of impressive. Fundamentally, the yen is pressured because investors continue to sell the currency that diverges the most on monetary policy with the Fed.

Are you looking for fast-news, hot-tips and market analysis?

Sign-up for the Invezz newsletter, today.

The Federal Reserve has already raised the funds rate and plans to do more in the near future. Another 100bp of rate hikes are already priced for the summer, and the European Central Bank also pivoted towards rate hikes.

But not the Bank of Japan.

By diverging from other major central banks in the world, the Bank of Japan gives the green light for further yen depreciation. So what is the next target for the USD/JPY?

According to the Elliott Waves Theory, the yen may fall to 140 and beyond by the end of the year.

Elliott Waves suggests 140 and more

Most of the recent gains for the USD/JPY came just ahead of May’s monthly candlestick to close. The quick move above 130 signals the end of a running flat pattern that started about a year ago.

A running flat has some interesting characteristics, such as the equality between wave a and wave c. Moreover, this equality includes time and not only price.

Effectively, it means that the two waves should be equal both in price and time. If these two conditions are met (and they are), then the running flat is confirmed.

Elliott traders also use the price action that follows a particular pattern. The market’s velocity tells if the pattern was part of a complex correction or it was a single, individual one.

Because the USD/JPY quickly moved above 131 in less than the time it took wave c to form, it indicates that the a-b-c is a simple correction. The implications are that the 2^nd wave of a bigger degree just ended in the last trading days of May, and now the 3^rd wave has begun.

As for the next move, the Elliott Waves theory argues that the 3^rd wave in an impulsive structure must be a minimum of 161.8% when compared to the 1^st wave. Hence, 140 is in the cards by the end of the summer and 145 by the end of the year, when the entire five-wave structure should complete.