USD/JPY trades at 20 years highs; how far can it go?

The story of the year so far in the FX market is the Japanese yen’s meltdown. All JPY pairs rallied lately, and the driver appears to be the USD/JPY.

The USD/JPY pair found a bottom during the COVID-19 pandemic. After trading below 104, it rallied in 2021 and closed the year at the highs.

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116 area offered resistance for many months, but eventually, bulls pushed the pair above. The Bank of Japan contributed to the upward pressure, given that it announced that it would buy unlimited amounts of JGBs as part of its yield curve control program.

After the consolidation just below the 116 area ended, the market did not look back anymore. What followed was literally a vertical line with no meaningful corrections.

So how far will the USD/JPY pair go now that it trades at a 20 years highs? And does it make sense to short the pair here?

Elliott Waves theory suggests the rally might come to an end soon

The Elliott Waves theory is based on interpreting impulsive and corrective waves of various degrees. These waves belong to different market cycles, and technical traders use numbers and letters to count impulsive, respectively, corrective waves.

Corrective waves may be simple or complex and are more common than impulsive ones. Interestingly, the USD/JPY’s case is that the segment that ended just below the 116 area is a running correction.

It is said that a running correction precedes an explosive move higher. More precisely, the extended wave in an impulsive structure follows a running correction.

Moreover, running corrections typically end with a triangle like the triangle forming below 116.

Now that the market traded above 128, it might be possible that the 3^rd wave will end as the extension (i.e., 161.8% of the 1^st wave) is completed. As such, we might see a correction towards the 122 area before a new attempt at the highs, as the final segment of the five-wave structure.

All in all, the JPY is at the center of attention, and everything else is a sideshow in 2022. Until the impulsive wave ends, the bias remains bullish.