It is Golden Week in Japan which for most Japanese, means that it is time for vacation. However for currency traders, Golden Week means potential weakness in USD/JPY. As the currency pair struggles to break above the psychologically important 120 mark…
the lack of Japanese economic data this week could make flows the primary driver of market activity. In a very unscientific, but nonetheless interesting study of price action, USD/JPY has ended lower during Golden Week 9 out of the past 12 years. Given that the study of technical analysis is based upon the belief of past price patterns repeating themselves, there is no purer way to analyze patterns than to look at actual price activity. When a behavior is repeated 75 percent of the time, it should not be ignored. The red bars in the graph below illustrate the pip change for USD/JPY over the past 12 years as well as the movements of EUR/JPY and GBP/JPY during Golden Week.
Why does this Pattern Exist?
One of the primary reasons why USD/JPY tends to see more weakness than strength during Golden Week is due to profit taking during the holidays. Golden Week, which is most often the first week of May, is celebrated in bothJapan and China and it also coincides with the May Day holidays in Europe. Therefore trading during that week is particularly thin since the Japanese are not likely to be the only ones to square positions. The Golden holiday week begins on April 29th with the last holiday celebrated on May 5th. Many Japanese and Chinese companies close for the entire week with this being the longest vacation period for most workers.
What about GBP/JPY and EUR/JPY?
Interestingly, USD/JPY is not the only currency pair to have a strong tendency to sell-off during Golden Week. In 8 out of the last 12 years, GBP/JPY also ended Golden Week lower. In the remaining 4 years, GBP/JPY was unchanged during 1 of those years and rallied in the remaining 3. As for EUR/JPY, the behavior is decidedly different. Since the introduction of the Euro, EUR/JPY has rallied just as often as it has fallen in the first week of May. There is no clear rationale for this odd price action, aside from the fact that interest rates were falling globally at the time. The Eurozones rates hit a low of 2.00 percent, while US rates hit a low of 1.00 percent. The lower level of US rates and more aggressive easing by the Federal Reserve could have made the US dollar more vulnerable to selling.
Implications for USD/JPY
Looking ahead, historical price patterns put the odds in favor of weakness in both USD/JPY and GBP/JPY this week. However, traders should be careful of relying solely on statistical significance since this is non-farm payrolls week also, which means that incoming data related to the labor market could lead to unexpected volatility in USD/JPY. We have already seen strength in the employment component of manufacturing ISM. If we see hot numbers in the ADP survey, Challenger layoffs and service sector ISM reports, the market could shrug off statistical significance to focus on implications for growth.
By Kathy Lien, Chief Strategist of DailyFX.com