Over the past 6 weeks, USD/JPY has had a tremendous run. On Feb 1, it was trading at 76 and today, it rose above 83.50. This 7.5 yen move impressed everyone, particularly given the lack of meaningful correction. But the burning question in everyone’s minds is how much further can USD/JPY rise. A few weeks ago, I pointed to the break of the weekly cloud cover as the main technical reason for my pro USD/JPY call. Since then, the pair has rise a mere 250 pips. This is peanuts compared to how much USD/JPY has run on past cloud breaks. From the top of the cloud to the top of the initial rally (not counting the pullback and continuation), USD/JPY rose 29 Yen (97 to 126) in 1995, 18 Yen in 2000 (108.5 to 126.85) and 12 Yen in 2005 (108.5 to 121). From a levels perspective, there will be resistance at the 2011 high of 85.50. In fact, we could even see a bit of consolidation around that level. But even if we low ball the potential move based on how weekly cloud breaks have performed in the past and then downgrade it some more, USD/JPY could easily reach 90.
The best part is that there is fundamental support for the rally. Unlike the Federal Reserve who has frozen monetary policy, Japan is on a rampage to keep the Yen weak through easy monetary policy. The massive current account deficit reported last week also changes the inherent dynamics in the Yen. Although this is expected to be temporary, for the time being Japan is no longer a surplus country. At the same time, rising U.S. yields is sending the dollar sharply higher. The only potential cause for a pullback in USD/JPY would be repatriation ahead of the March 31st fiscal year end.
1995 break - 29 Yen in 21 months
2000 break - 18 Yen in 5 months
2005 break - 12 Yen in 5 months
2012 break - 7.5 Yen in 1 month