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USD/JPY Gaps Ahead of BoJ Meeting as U.S. Considers Trip to China

USD/JPY Gaps Ahead of BoJ Meeting as U.S. Considers Trip to China

David Song, Strategist

FX TALKING POINTS:

- Bullish USD/CAD Sequence Continues to Take Shape Ahead of Bank of Canada (BoC) Testimony. All Eyes on Governor Stephen Poloz.

- USD/JPY Gaps Higher as U.S. Considers Trip to China. Same Old Bank of Japan (BoJ) Meeting to Fuel Larger Rebound.

DailyFX Table

BULLISH USD/CAD SEQUENCE CONTINUES TO TAKE SHAPE AHEAD OF BANK OF CANADA (BOC) TESTIMONY. ALL EYES ON GOVERNOR STEPHEN POLOZ.

USDCAD Table

Fresh comments from Bank of Canada (BoC) officials may impact the near-term outlook for USD/CAD as Governor Stephen Poloz and Deputy Governor Carolyn Wilkins are scheduled to testify in front the Standing Committee in Finance later today.

In light of the fresh updates from the BoC, the central bank appears to be on track to retain the current policy throughout the first-half of 2018 as ‘escalating geopolitical and trade conflicts risk undermining the global expansion.’ In turn, the BoC may continue to endorse a wait-and-see approach for monetary policy, with the Canadian dollar at risk of facing headwinds ahead of the next meeting on May 30 as the central bank persistently tames expectations for higher borrowing-costs.

Bear in mind, fresh data prints coming out of the U.S. economy may also influence the exchange rate as the Gross Domestic Product (GDP) report is anticipated to show the growth rate slowing to a n annualized 2.0% from 2.9% during the last three-months of 2017, and a marked slowdown in economic activity may ultimately tame the near-term advance in USD/CAD as it limits the Federal Open Market Committee’s (FOMC) scope to extend the hiking-cycle.

Nevertheless, recent price action keeps the near-term outlook tilted to the topside as USD/CAD extends the bullish series from the previous week, while the Relative Strength Index (RSI) quickly approaches overbought territory.

USD/CAD DAILY CHART

USDCAD Daily Chart
  • USD/CAD is quickly coming up against the 1.2830 (38.2% retracement) region, with a break/close above the state region raising the risk for a move back towards the Fibonacci overlap around 1.2980 (61.8% retracement) to 1.3030 (50% expansion).
  • Next region of interest comes in around 1.3130 (61.8% retracement), which lines up with the 2018-high (1.3125), with the next hurdle coming in around 1.3290 (61.8% expansion) to 1.3310 (50% retracement).

For more in-depth analysis, check out the Q2 Forecast for the U.S. Dollar

USD/JPY GAPS HIGHER AS U.S. CONSIDERS TRIP TO CHINA. SAME OLD BANK OF JAPAN (BOJ) MEETING TO FUEL LARGER REBOUND.

USDJPY Table

USD/JPY gaps higher as U.S. Treasury Secretary Steven Mnuchin states a trip to China is ‘under consideration’ to negotiate a potential trade deal, and the recent advance in the dollar-yen exchange rate may gather pace over the coming days should the Bank of Japan (BoJ) stick to the Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control.

Fed Fund Futures

With Treasury Secretary Mnuchin ‘cautiously optimistic’ in reaching an agreement with China, the narrowing threat for a full blown trade war may encourage the Federal Open Market Committee (FOMC) to implement four rate-hikes in 2018, and Chairman Jerome Powell and Co. may adopt a more hawkish tone at the next rate decision on May 2 as ‘the Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.’

In turn, growing expectations for the benchmark interest rate to hit the 2.25% to 2.50% threshold may heighten the appeal of the greenback, with dollar-yen at risk of staging a larger recovery as the Relative Strength Index (RSI) appears to be flashing a bullish signal.

USD/JPY DAILY CHART

USDJPY Daily Chart
  • USD/JPY sits at a key juncture as it comes up against the 108.30 (61.8% retracement) to 108.40 (100% expansion) region, with a break/close above the former support-zone raising the risk for more meaningful recovery in the exchange rate.
  • Keeping a close eye on the RSI as in snaps the downward trend carried over from the previous year, with a move into overbought territory largely indicating that the bullish momentum is gathering pace.
  • Next topside hurdle comes in around 109.40 (50% retracement) to 110.00 (78.6% expansion) followed by the overlap around 111.10 (61.8% expansion) to 111.60 (38.2% retracement).

For more in-depth analysis, check out the Q2 Forecast for the Japanese Yen

Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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