Less than a month ago, USDJPY was trading below 105.00 after plunging to 104.64. The media hurried to explain the dollar’s weakness against the Japanese yen with the looming trade war between the United States and China. Today, a trade war between the two largest economies is a near certainty, after China threatened to fight back and impose $50 billion worth of tariffs on 106 U.S. goods, including soybeans, aircraft and vehicles. Yet, USDJPY’s reaction to the trade war escalation is in the exact opposite direction this time with the pair climbing to 107.68 so far.
How come? If USDJPY initially fell when the U.S. imposed its first tariffs, why didn’t it accelerate to the south, when both countries threatened to go to a full-blown trade war? The logic behind USDJPY’s rally escapes us, too, but the Elliott Wave Principle comes to the rescue. A pattern hiding in plain sight on the chart below, sent to subscribers before the market opened on March 26th, holds the answer.
Two patterns, actually. First, there was a five-wave impulse to the downside from 114.74 to 104.64. Two degrees of trend could also be recognized within wave 3). According to the theory, every impulse is followed by a three-wave correction in the opposite direction. And second, there was a triangle in the position of wave 4) of the five-wave decline and the Wave principle states that triangles precede the final wave of the larger sequence. In USDJPY’s case, that is wave 5). So, the 4-hour chart led us to conclude that “a recovery to 108.00 should soon begin.” That was 19 days ago. An up to date chart is given below.
USDJPY has not reached 108.00 yet, but it is almost there. In addition, the recovery took the bulls a lot less time than we expected. Had we ignored the charts an listened to the trade war narrative, the pair’s rally would have caught us completely by surprise. Besides, recognizing a pattern on a chart turns out to be a lot easier than predicting President Trump’s decisions.
What would USDJPY bring next week? That is the subject of discussion in our next premium analysis due out on April 16th.