Recently, the USD/JPY has been on a tear higher and breaking out. The last trend line (daily chart) that I can see has been taken out as of two weeks ago on the break above 81.50 level. Since then, the USD/JPY has been consolidating its gains and now appears to be forming a bull flag pattern on the 4hr/daily chart.
If you look at the possible implications of the flag extension below, it takes us beyond the 85.00 level and through the neckline of the inverted H&S pattern. Don’t think that this pattern has started because there still is a lot of work to do. First, we have to start the flag with a move beyond the 82.30 level, then take out resistance at 82.80. Beyond there momentum should pick up towards the weekly “neckline” at 84.00. However, the full extension of this pattern clears all those levels in the weeks to come. Also another potential headwind is CFTC data also points to larger positioning of JPY shorts in recent weeks.
Many of you may ask “what are the implications of a move of that magnitude?” In recent years, equities would thrive on a move lower in JPY and a rally in the USD (or any other currency). Also, bonds would typically move lower and yields would move higher in normal correlation of years past. But what you notice below is that two weeks ago the correlation between bonds (using example of TLT) and the USD/JPY had broken.
Correlations don’t break in a day, but tend to take a series of events to actually “break” them. So, if the USD/JPY does break higher in the coming days or week, before you get long equities or short bonds, you should monitor price action carefully in case those correlations have indeed “broken.”
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Disclaimer: I have been long the USD/JPY for last 2 weeks