By Ron William, CFTe, MSTA

JPY: Catching the Falling Knife?

JPY has been in free-fall liquidation, down nearly 20% YTD, becoming the worst performing currency among its developed G10 peers. Having fallen to a 24-year extreme, pundits are debating how much further can it go? Technical signals warn of a USD/JPY price danger zone at the psychological level of $140 (figure 1). Watch latest media interview for more details.

USD/JPY Price Danger Zone $140-$135

This also coincides with a major seven-year cycle on JPY CME futures, predicting a key turning point into early 2023 (figure 2). This chart was originally featured by FSC board member, Jake Bernstein at our July FSC Market Forecast Summit. Astute investors will naturally ask how to avoid “catching the falling knife?” The answer depends on time horizon, tactics, and risk management. No doubt short-term traders will continue to chase momentum returns. Meanwhile, price exhaustion is likely to develop through a variation of technical patterns, including a consolidation phase, or perhaps a sharp V-shape mean-reversion. In either scenario, contrarian plays offer a viable risk-reward profile, if and once a reversal signal is confirmed.

Major 7-Year Cycle Signals Reversal


The one-year drawdown in JPY is within the scope of historical capitulation phases (figure 3). Over the last 40 years, selloffs have been around 15-20% especially during major events (e.g., the Asian financial crisis-1998, TMT crash-2000, and Abenomics-2012).

Historical Capitulation Phase 15-20%


Sentiment proxies exhibit overcrowding, with speculators historically overextended on this “big short” macro trade (figure 4). This is also reinforced by a recent Bank of America survey of fund managers. Why so? Low rates in Japan have led to the proliferation of carry trades. While these are likely to persist, this is now becoming a classic “greater fool theory” behavioral trap.

Overcrowded Big-Short Sentiment


Watch three key macro factors to suggest the winds of change ahead. 1: If USD weakens in H2 2022, in line with our cycle model predictions. 2: Stabilisation and/or reversal in US10Y, which has been highly correlated to USD/JPY price action (figure 5), although US10Y is now reversing under its 50-day YTD trend. Yield curve control was leading to capitulation of both domestic and foreign investors, fleeing from Japanese bonds towards external bond markets. 3: Energy price inflation abating, thereby relieving JPY selling pressure to pay for more expensive imports in USD.

Top Three Macro Factors to Watch

Look for more details in a future Halkin letter. Looking ahead, a return to JPY strength will also revive safe-haven qualities. Indeed, JPY still appears to have the best correlation with a rising VIX, coupled with CHF (figure 6). In this heightened VUCA world, developing a robust and anti-fragility strategy remains key!

JPY Remains Safe Haven in Elevated Volatility

Thank you to all FSC members for all your kind feedback and insightful questions on our new FSC Blog market series! I welcome more interaction:

Read Ron William's full bio here (bottom of the page).