Talking Points:

  • USD/JPY has bounced at the important former lows of 2017
  • However, it hasn’t yet managed to entirely convince
  • AUD/JPY will probably bounce too, but that may take longer

Find out what retail foreign exchange traders make of the Japanese Yen’s prospects at the DailyFX Sentiment Page

The Japanese Yen’s strength against the US Dollar has run into problems around the last significant low from 2017, from which the resurgent greenback seems to be building some sort of base.

USD/JPY has found support in the 108.40 area in the past two weeks, which is about where the pair bottomed out in early September last year.

Japanese Yen Technical Analysis: Be Wary of USD/JPY Bounce

There’s sound enough fundamental reason for this latest bounce. US bond yields are rising and the Federal Reserve appears on track to raise interest rates at least twice this year and, conceivably, more often. The process could begin as soon as next month with the Chicago Mercantile Exchange Group’s influential ‘Fedwatch’ tool putting the probability of a March hike at nearly 70%.

The Bank of Japan meanwhile continues to kick back like a mule against any suggestion that its own ultra-loose monetary settings could be loosened before the inflation rate is a sustainable 2%/ It’s currently running at around half that rate.

The upshot is that interest-rate differentials would still appear to support the US Dollar against the Japanese Yen at least as staunchly as they have for most of the post-crisis period and, as the US raises rates, perhaps even more so.

All that said US Dollar bulls still have work to do if they are to build seriously on the platform given to them by USD/JPY’s bounce near those former lows.

The pair has managed to carve out for itself the beginnings of an uptrend channel if we ignore the intraday low of last Tuesday, something I’d argue that we are entitled to do given the session’s unusual cross-market volatility.

But it’s looking a bit half-hearted so far. Indeed one upward foray has already petered out in the 110.47 region.

Japanese Yen Technical Analysis: Be Wary of USD/JPY Bounce

If bulls can’t produce the energy to challenge near-term resistance around 111.40, where the market loitered back in mid-January, then the recent lows will come back into focus again. Those currently uncommitted as to a short-term play may be well advised to watch this uptrend channel as a test of bullish resolve. It if it survives on a weekly close then it may hold at least until it can test those resistance levels.

The Australian Dollar has taken a hit against the Japanese currency in the last week. This came thanks to some weaker Australian retail numbers, a clear lack of interest in early rate hikes from the Reserve Bank of Australia and a general retreat from assets with strong links to the global growth cycle, such as the Australian Dollar, in favor of those with perceived haven qualities, such as the Japanese Yen.

Japanese Yen Technical Analysis: Be Wary of USD/JPY Bounce

It’s debatable as to whether these impulses will weigh for long on the Aussie – its home economy is broadly strong and getting stronger and ‘risk’ seems to be back on the table for investors as equity’s mini-rout fades. Nevertheless, AUD/JPY may test further lows before composing itself. December’s lows in the 0.84 region look firm enough but may be revisited if Aussie bulls can’t get back to their former range fairly soon.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX