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USD/JPY analysis for March: the exchange rate may grind higher and remain volatile

By David Becker

The coronavirus crisis has generated whipsaw price action

The USD/JPY is trading in the middle of a 11-big figure range that the currency pair has experienced during February and March. The coronavirus crisis has generated whipsaw price action. The implied volatility on the USD/JPY climbed above 30 per cent for the first time since the financial crisis of 2008, as investors scrambled to purchase option protection. While the dollar continues to rise against most major currencies, the yen has also been experiencing flight to quality.

US yields surge

The dollar has rebounded against the yen in the past week, as US yields have surged relative to Japanese government bond yields. The US 10-year treasury yield has moved from a low of 31 basis points last week to 1.1 per cent. This comes despite an announcement by the Federal Reserve that interest rates would be cut to zero, and the central bank would embark upon a bond purchase programme similar to that used during the financial crisis. The incredible amount of stimulus that the Fed has announced has yet to be incorporated into market prices.

Implied volatility on the USD/JPY has risen to the highs seen in 2008. According to the Chicago Board of Options Exchange, the “at the money” implied volatility on the USD/JPY has climbed to approximately 30 per cent in March, which is the highest it has been since the financial crisis. This is reflected in the yen VIX. This means that options traders believe that the USD/JPY could rise or fall 30 per cent from current levels.

USD/JPY technical analysis

The exchange rate range on the USD/JPY in February and March was larger than the range experienced for the entire year in 2019. With the currency pair trading in the middle of the range, short-term resistance is seen near the 200-day moving average at 108.2. Additional resistance is seen near the 50-day moving average at 108.86. There is a lot of overhead resistance which will make it difficult for the dollar to rise against the yen. Support is seen near the March lows at 101.18.

Positive momentum is accelerating

Medium-term momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. This occurs as the MACD line (the 12-day moving average minus the 26-day moving average) crosses above the MACD signal line (the nine-day moving average of the MACD line). The MACD histogram has also crossed above the zero index level with an upward sloping trajectory which points to higher prices for the USD/JPY.

Short-term momentum has also turned positive as the fast stochastic generated a crossover buy signal in oversold territory and accelerated higher. The current reading on the fast stochastic is 65, which is in the middle of the neutral range and would generally point to consolidation.

The USD/JPY is in a large range and for the balance of the month the high levels of implied volatility point to whipsaw price action. Both rising US bond yields and the momentum point to a higher exchange rate. Current levels of resistance mean that it will be difficult for the currency pair to make headway. The outlook is for the exchange rate to grind higher and remain volatile for the balance of March.

The bottom line

FURTHER READING: Which investments are the best during a recession?

FURTHER READING: How to read trading charts

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