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USD/JPY Rate Analysis: Why the Adjusted Yield Curve Control Matters

USD/JPY Rate Analysis: Why the Adjusted Yield Curve Control Matters

2018-09-05 17:00:00
Tyler Yell, CMT, Currency Strategist
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USD/JPY Rate Forecast Talking Points:

  • The ONE Thing: The upper bound for the accepted 10 Year Japanese Government Bond (JGB) has been shifted higher, which could take USD/JPY higher as well. The immediate aftermath of this announcement was for the yields to rise to 0.14% before settling back lower. A higher JGB has been correlated with a higher USD/JPY so traders should watch this intermarket marker closely.
  • Technical Analysis or the Japanese Yen: While USD/JPY remains fixed between 112 and 110, the bullish undertones seem to favor buying near 110 or on a break above 113. Weekly charts also show spot moving above cloud resistance and the weekly Ichimoku trigger line (9-week midpoint.) Further support can be found at 110.64 (cloud bottom,) and 110.50 (100-DMA.)
  • Trade wars have been in the news. If you’re not familiar with trade wars and their history, We've got you covered

KEY TECHNICAL LEVELS FOR JAPANESE YEN RATE TO US DOLLAR:

  • Overall Bias: Bullish on the bounce from 38.2% Fibonacci Retracement & the Weekly Ichimoku Cloud
  • Resistance: 112.15 Japenese Yen to USD, July 31 High
  • Spot: 111.51 Japenese Yen to USD, per USD
  • Support: 110.50 Japenese Yen to USD,, 100-DMA

Putting A Price Consolidation In Context

A favorite technical analysis truism that has helped my trading is that consolidations on the price charts tend to favor trend continuation. The problem with USD/JPY is that consolidation has eaten up a lot of time.

A broader look at the US Dollar does seem to favor that we could see further weakness in the coming weeks as the largest speculative Dollar Index position in 52-weeks is failing to lift USD to new 2018 heights, which can be seen as s form of divergence.

The lack of further impulsiveness in the US Dollar is not only a small consolation for Emerging Markets (their pain would much worse if the USD strengthened very aggressively), but it should also put the USD/JPY move in context. The current set back in the US Dollar is aligning with a sideways consolidation in USD/JPY that may precede a stronger move higher.

Fundamental Bullish Backdrop for USD/JPY - YCC Alt'd

Please add a description for the image.

Data source: Bloomberg

Recently, the Bank of Japan made a significant, albeit quiet adjustment to their monetary policy when they said they’d allow/ embrace a higher upper band for Japanese Government Bonds (JGB) 10-year yields from 10bps to the 20bps, and that may not be the final destination. This massive shift in BoJ policy of Yield Curve Control (YCC) is happening at a time when Japanese data is on the upswing, and JGBs are more data-dependent than they’ve been since 2012.

The chart above is designed to illustrate the point that when JGB 10Yr yields (blue area) have moved lower, the Yen has strengthened. As the JGB yielded positive again, the pair rose. Now that the BoJ is embracing a higher yield (i.e., they won’t step in to buy and keep a lid on yields), Japanese Yen crosses could be supported for further gains.

USDJPY Chart: 240-Minute Shows Sideways Correction after Impulse

Please add a description for the image.

Chart Source: IG UK Price Feed. Created by Tyler Yell, CMT

Technically Speaking on USD/JPY:

I have long spoken of the multiple year triangle pattern in USD/JPY that aligns with the truism earlier mentioned of consolidation tends to precede trend continuation.

The triangle is likely still in play below 113.15, the summer high and above 104.6, the 2018 low.

The shorter-term picture focuses on the 100-DMA at 110.50 and the recent bounce at 109.92, which is the 38.2% retracement level of the 2018 range. A hold above there would make buying JPY (shorting USD/JPY a near exercise in futility) given the broader technical pattern that favors a bullish continuation when the time is right.

As noted before, some technicians are predicting a move toward 125.85 in USD/JPY, but first, we’ll likely need to see JPY weakness emerge against other key currencies like EUR/JPY above 137.5 or GBP/JPY above 147.05, which is a trade I’m actively watching.

More Support to Build Your Strategy:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q3 have a section for each major currency, and we also offer an excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.

---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 trading educational resources. Read more of Tyler’s Technical reports via his bio page.

Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.

Talk markets on twitter @ForexYell

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

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