This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Summary
- The US election triggered very choppy price action across all asset classes, with the USD especially volatile this week.
- USD/JPY, after spiking initially following the Trump victory, has pulled back considerably.
- USD/JPY price action makes us think further upside will not come easily, although volatility is likely to persist.
Market Implications
- More USD/JPY downside, as we have argued in recent weeks, is still our favoured outcome.
- Additionally, for anybody worried about USD noise from US politics, JPY bulls can also look at EUR/JPY, which we think also has room to trade lower.
The US Election Triggers Wild Price Action in USD/JPY
Last week, we made a case for USD/JPY downside, but preferred to take a gradual, scaled-in approach to building a short position.
Our concern was that with the event risk over the past week – including the US jobs report last Friday, the US election result and the Fed rate decision this week – was elevated enough to warrant a cautious strategy.
This caution proved sensible.
After printing as low as ~151.28 and then closing at ~151.60 on US election day, the pair traded as high a 154.70 the day after, or roughly 2% higher than the previous close.
Since then, USD/JPY has retraced about three-quarters of the spike higher after the Trump election victory (Chart 1).
Chart 1: USD/JPY Spot Rate = Orange Line
USD/JPY Technicals Have Only Partially Unwound
As we highlighted two weeks ago (and reiterated last week), one key technical indicator, the Relative Strength Index (RSI), looked stretched to the upside.
Specifically, the RSI for USD/JPY was near a level signalling that the pair was overbought.
RSIs are only one of the indicators that technical charting specialists use in their analysis of markets.
RSIs are a ubiquitous indicator in the technical analysis world, and we very much like them as a tool, not only because they are widely used, but also because of their simplicity.
By this, we mean the 30/70 rule for RSIs.
Simply put, when an RSI breaches 30 on the downside, the security being studied is oversold. And, conversely, when an RSI breaches 70 on the upside, the security being studied is overbought.
Last week, the USD/JPY RSI printed above 70 and, although it has unwound somewhat from this overbought level, we would argue it still has room to unwind further (Chart 2).
Chart 2: USD/JPY Spot Price and RSI
In addition to the RSI analysis, price action this week has shown that the 154/155 level will prove a strong resistance to further USD/JPY upside.
This week’s up move stalled at ~154.70, and this was also a price zone that saw some congestion in late July, following the initial move lower in USD/JPY from the 2024 high above 160 a few weeks earlier.
USD/JPY price action has been, and will most likely remain, choppy.
Nonetheless, we think further upside is limited.
EUR/JPY Is a Good Alternative Short to USD/JPY
It is understandable if this volatility in USD/JPY puts people off initiating any position, short or otherwise, in the pair.
Moreover, as my colleague Ben Ford outlined in a piece this week, additional USD upside in the weeks following an election often occurs.
Ben found that Republican victories, especially second terms, are likely followed by dollar strength in the month after the election.
Given this dynamic, JPY bulls can also look at EUR/JPY downside as an alternative to being short USD/JPY. We think that, over the past week or so, EUR/JPY looks to be topping out at 165/166 (Chart 3).
Chart 3: EUR/JPY Spot Rate = Orange Line
The argument here is that the Eurozone could be especially vulnerable to Trump tariffs, and that all EUR crosses, including EUR/JPY, will suffer to the downside.
If USD/JPY downside is not as attractive due to prospective, broad USD upside this month, EUR/JPY could be the way to play JPY strength.