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The big picture shows several very significant features. First, the drop from 1998 followed a fairly well-formed channel that was interrupted in October 2011 by a massive QQE expansion. The subsequent yen devaluation (USDJPY increase) sent the pair screaming higher where it barely reacted at the yellow .382 — not even dropping to the next lower Fib level.Another QQE expansion sent it spiking out of the huge channel and up to the yellow .618 at 120.11 where it was quite overdue for a retracement. However, since the pair is carefully managed by the BoJ, and any decline is instantly translated into falling equity prices (thanks to the yen carry trade), it was, again, not really permitted to react.
It has occasionally drifted lower, but as soon as equities start sagging it is immediately brought right back up to that key Fib level. Finally, this past May, it broke out. But, it almost immediately ran into the rising purple channel that broke down back in 2008.
This backtest has proven problematic for USDJPY’s continued upside, as has the BoJ’s pause in announcing additional QQE. USDJPY dropped and almost backtested the .618 in July. Stocks were not pleased. But, it was nothing compared to the bloodbath that ensued when USDJPY dropped below the .618 in last August.
That’s when the wheels came off the bus.
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