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Traders Believe USD/JPY Could Rally Further – What Could Change?Traders Believe USD/JPY Could Rally Further – What Could Change?

Fundamental Forecast for Yen:Bearish

The Japanese Yen finally showed signs it might break its long-standing trading range as it fell to multi-month lows versus the resurgent US Dollar. But will the post-NFPs USD rally be enough to take the USD/JPY to fresh decade-plus peaks?

A quiet week to come for US and Japanese economic event risk makes it onstensibly unlikely that we see major breakouts in Greenback and Yen pairs. Yet it is likewise clear that recent market volatility and sharp US Dollar strength will lead many traders to scrutinize even second-tier events. Thus we will focus on scheduled speeches from the US Federal Reserve and the Bank of Japan, while upcoming USAdvance Retail Sales figures and US Producer Price Index inflation reports could likewise move markets.

The key question for Dollar traders is well-known: will the US Federal Reserve finally raise interest rates in December? A sharply better-than-expected US Nonfarm Payrolls report significantly increased the likelihood, and the interest-rate sensitive USD/JPY exchange rate quickly rallied to multi-month highs. Yet we can’t help but feel a tremendous sense of déjà vu; it’s not the first time that the US Federal Open Market Committee seemed almost-certain to end its six-year Zero Interest Rate Policy (ZIRP).

Futures markets show the implied probability of a December rate hike at an impressive 70 percent, but it’s easy to remember how quickly market expectations can change given the 40 days until the much-anticipated decision.

Scheduled speeches from Fed officials in the days ahead will take on special significance, and traders should keep an especially close eye on US yields and the yield-linked USD/JPY. On the Japanese calendar we’ll keep an eye on a planned talk from the Bank of Japan’s newest board member Yutaka Harada. BoJ Governor Haruhiko Kuroda made it fairly clear that the central bank is quite unlikely to change monetary policy through the foreseeable future. Yet any strong signs of dissent among BoJ board members could shift current market expectations in favor of further Quantitative Easing, and the JPY would likely fall on any such indications.

The US Dollar’s impressive rally leaves short-term momentum to the topside not only against the JPY but across the board. Indeed, recent CFTC Commitment of Traders data shows that large traders have aggressively bought into the recent USD surge against the Euro and the Yen in particular. The risk is clear, however; the danger of a pronounced reversal grows as the Dollar hits further peaks.