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US Dollar Traders Should Keep an Eye on USD/JPY for Next Big Moves

US Dollar Traders Should Keep an Eye on USD/JPY for Next Big Moves

David Rodriguez, Head of Product


Fundamental Forecast for Yen:Bearish

The Japanese Yen finished the week near critical resistance versus the US Dollar (USD/JPY support), and whether or not it trades higher could have a significant impact on the USD across the board.

Traders sent the Greenback sharply lower versus the highly interest-rate-sensitive Japanese Yen as the US Federal Reserve disappointed many and kept interest rates unchanged at its highly-anticipated meeting. Yet it’s significant to note that the USD/JPY remained above key support at the ¥119 mark —it seems investors were not quite willing to force a larger breakdown.

A holiday-shortened week in Japan and relatively limited economic event risk out of the United States make it relatively unlikely that we see a substantial breakdown through the coming days. Key exceptions will include National Consumer Price Index inflation figures out of Japan as well as a handful of planned speeces from key figures of the US Federal Reserve.

Japan’s inflation data will likely show that prices rose a negligible 0.1% in the 12 months ending in August—a far cry from the Bank of Japan’s official 2.0 percent target and a key reason many expect further stimulus from the central bank. Any disappointments in CPI figures will only compound pressure on Bank of Japan Governor Kuroda to increase Quantitative Easing purchases. One prominent advisor to the Japanese Prime Minister Abe went as far to say that the BoJ’s October meeting represents a “good opportunity” to ease policy further.

The risk to the Yen is clear: fresh BoJ easing would likely force JPY losses versus major FX counterparts. Last year the USD/JPY went from ¥109 to a high near ¥122 after the Bank of Japan announced aggressive monetary policy easing. It seems unlikely that fresh easing would spark another 1000+ pip USD/JPY move, but the risks of near-term depreciation is clear.

Monetary policy expectations may keep downward pressure on the Yen (upward on USD/JPY), but it is likewise clear that pronounced financial market turmoil can force significant JPY appreciation in a hurry. This was most obvious during the sharp S&P 500 and Japanese Nikkei 225 sell-offs through mid to late August as the USD/JPY plummeted as much as 900 pips in under two weeks.

A recent slowdown in financial market tensions has kept the USD/JPY above key support. Yet a recent build in USD/JPY-long positions suggests that a broader panic would force similarly outsized losses. Ultimately a break below ¥119 could help confirm that the US Dollar trend has turned and would likely coincide with a larger USD breakdown versus the Euro and other major FX counterparts.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.