The USD/JPY exchange rate inched up 0.43% to close at 123.15 yen per dollar on Monday, after the Cabinet Office of Japan said gross domestic product (GDP) shrank at an annualized pace of 0.8% in the July-September period from the previous quarter, following a revised 0.7% contraction in the second quarter, missing the economists’ forecast of a 0.2% decline. After two consecutive quarterly contractions, Japan is now technically considered to be in recession, the second recession in two years. 

Business investment was weak and inventories are shrinking, as Japanese companies are holding back on spending and production due to slow growth in China and a weak global outlook. Private consumption, accounting for about 60% of Japan’s GDP, grew 2.1% after contracting 2.3% in the previous quarter.

The Ministry of Internal Affairs and Communications of Japan said at the end of October that the unemployment rate was 3.4% in September, unchanged from the previous month and in line with expectations. While the low unemployment rate in Japan suggests a tight labor market, nearly all recent job growth has gone to temporary workers without fixed hours, The Wall Street Journal said. 

The yen was under selling pressure in early November, after the U.S. Labor Department released the nonfarm payrolls report for October showing 271,000 jobs were added to the economy, while the U-3 headline unemployment rate dipped to 5.0%, from 5.1% in September. Wall Street economists were way off with their forecasts, as the consensus expectations were only for a 180,000 jobs gain with the unemployment rate remaining at 5.1%.

Based upon the recent unemployment data, several Fed officials are now saying that they are ready to raise rates despite weak U.S. retail sales and an industrial sector that is heading into a technical recession. According to the New York Times, William C. Dudley, the president of the Federal Reserve Bank of New York, said on Thursday that he sees a stronger case for moving ahead as the risks of acting too soon and waiting too long as “nearly balanced.”

The federal funds futures, traded on the Chicago Mercantile Exchange and commonly used to estimate the market’s views on the likelihood of changes in U.S. monetary policy, indicate 32.2% odds for a quarter-point rate hike and 67.8% odds for a half-point rate hike at the Fed's December FOMC meeting, according to data from the CME Group as of November 16.

As of November 10, there are 99,577 short positions of Japanese yen, traded on the Chicago Mercantile Exchange (CME) in units of 12,500,000 Japanese yen, by leveraged funds, an increase of 20,580 contracts from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. This is compared to about 25,156 long positions, a decrease of 3,848 contracts during the same period. 

The net short positions have increased by 24,428 contracts, worth about 305.35 billion yen, reflecting the growing weakness of the Japanese economy and the likelihood of a Fed rate hike in December.

From our technical viewpoint, the USD/JPY has been moving in a symmetrical triangle (SYM TRI) chart pattern since December 2014, a narrow trading band between 118 yen per dollar and 125 yen per dollar, as traders can’t decide in which direction the Japanese yen would move next. The currency pair broke out the trendline resistance (T/R) and is building up momentum for the next move towards the 124.16 yen per dollar level, or the June 2007 resistance. As hedge funds are piling on their short positions, and that Abenomics has failed, it could just be a matter of time until the 125-125.50 yen per dollar level will be broken.