USD/JPY Rate Forecast Talking Points:
- USD/JPY Price Forecast: Break > 108 would favor broader JPY weakness
- Rising global yields help to pave backdrop for emerging bullish bias
- USD/JPY Rate Insight from IG UK: changes in retail sentiment favors price declines
USD/JPY may be on the brink of a breakout thanks in large part to macro forces that could be pushing risk-seekers to engage in the carry trade as Japan’s fiscal year 2019 gets underway. As I argued in a recent presentation I provided in Johannesburg and Singapore, all the good stuff gets backed into the fixed income market via higher or lower yields.
Currently, forces such as commodities that are a key factor in inflation are pushing yields higher with US 10-year Breakevens seeing the highest level in four-years. A quick look below can help you see how crude oil, which is trading at the highest levels since Q42014 is bringing higher inflation expectations as well.
Chart: Inflation Fears Stoked on Rising Oil
Data source: Bloomberg
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The blue area is inflation expectations per the US fixed income market. As you can imagine, such an environment of higher hard assets and yields (lower bond prices) makes the prospect of engaging in the carry trade appealing, which could further lift USD/JPY.
Another sign of renewed life in the carry trade came Thursday with the resumption of EUR/CHF over 1.2000 for the first time since January 15, 2015.
The rising inflation expectations are also aligning with waning geopolitical tensions that helped support the Japanese Yen. As tensions wane, risk appetite is expected to help JPY and CHF weaken further. This environment may help USD/JPY move into the 108-110 range in the coming weeks.
USD/JPY Rate Trades Into Ichimoku Cloud with Focus On Potential Breakout
Chart Source: Pro Real-time®, an IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT
Recently, JPY weakened to a seven-week low and the trend looks set to continue as further JPY weakness is expected to take USD/JPY higher.
Support levels on USD/JPY are at 106.90, the 55-DMA and 106.50, the prior price support points on the chart as well as the H4 Ichimoku cloud displayed above.
For traders who appreciate the Ichimoku cloud (click here for a free guide if you’d like to learn more), you’ll notice above that the recent trend of JPY strength that saw USD/JPY fall by over 7% appears to be eroding and giving way to a new uptrend.
Key resistance on the move higher that traders should watch for is the April 13 high of 107.78 followed by the 38.2% Fibonacci retracement that is derived from the November to March range at 108.44. Given the potential for a large unwind of JPY long positions in the futures market, a squeeze higher could be the result that should not be a surprise given the fundamental backdrop for a move higher.
Chart: Institutions Remain Very Long JPY, Watch For An Unwind
Article source: CoT Weekly Sentiment Update – EUR/USD, USD/JPY, Crude Oil & More
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We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDJPY prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USDJPY-bearish contrarian trading bias.
---Written by Tyler Yell, CMT
Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.
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