Look Out: USDJPY Breaks Resistance

If this is a breakout in USDJPY, the immeidiate reaction will be "bullish." The yen has been inversely correlated with economic growth since the 2000s, it has been the "risk off" currency and became correlated with gold. The charts below show USDJPY and gold inverted. If the correlation is still alive, the breakout in USDJPY would be bearish for gold.

There is resistance along the way, not drawn, but if this is breakout that holds, the next major area would be around 120, after that the neckline of a monster head-and-shoulders pattern around 125. Complete that and the initial target is 175...getting ahead of myself. If this breakout in the dollar versus instead signals a break with the past and something new, that something new might be high inflation or fiat currency destruction coming to Japan first. A decade ago most investors believed the yen would sink first. In my scenerio, China would likely sink first and take down other export currencies, but the yen going first would probably quickly sink the won and yuan. Or perhaps this hints that Japan will fare much worse than the U.S. under inflationary conditions.

Whatever the implications, the yen is a major currency. It's correlation with gold makes its direction important for gold investors and traders, more important than the U.S. dollar in my opinion. A sustained breakout in USDJPY is big news. It would put a floor on the DXY, potentially fueling a much bigger or faster rally than anticipated.

A broader dollar bull market would most likely accompany a reversal in the euro. EURJPY remains one to watch as well. It broke out of a smaller triangle, which is bullish for the global economy and inflation. The line to watch here is the blue one at 132 (along with the green uptrend in the shorter-term). A failure in EURJPY combined with rising USDJPY (euro loses) would create a major up move in DXY, potentially leading to the epic dollar bull market I've discussed at IICS for years, as have others such as Brent Johnson of Santiago Capital (who has a more generally bullish Milkshake Theory). The DXY target would be 120 or higher, with higher likely.

A reversal in USDJPY and EURJPY (yen wins) could signal the traditional "risk-off" event with a major correction in stocks and commodities likely.

A major rise in EURJPY and USDJPY, but with EUR beating USD, would signal possible trouble in Japan down the road, but would be a risk-on for inflation trades signal in the short-term. This seems like a possibility because Japan is a resource importer.

Finally, if EURJPY rises and USDJPY sinks, that's your traditional dollar-down bear market in action. A possible breakdown in the dollar would be years away, roughly 5 to 6 years at least because that's when I'd expect a normal bear market to terminate.

Here's EURUSD. It has broken back below former resistance, a potential failure in the making. Things start getting more bearish below $1.16, which would probably conincide with a DXY rally towards the 96 area.

Finally, the DXY. The 96 area remains the upper target for a correction within a bull market. EURUSD might be around $1.12 then, not far off the blue support line. No matter which way the markets go long-term, a test of all these various levels will be accompanied by financial market volatility. The final DXY resistance is around 100, after that it breaks longer-term resistance and runs to a level that most would consider unfathomable today. In that scenario, the March 2020 was only a hint of the bigger panic coming.