USD/JPY Rate Forecast Talking Points:
- The ONE Thing: Key markets are helping to weaken the JPY, which is taking USD/JPY higher. Higher equities as seen in the Nikkei and higher US Treasury yields, especially on the front end are guiding USD/JPY toward the 113.39 JPY per USD 2018 high, and possibly beyond.
- The markets are anticipating a supportive Federal Reserve at Wednesday’s FOMC meeting. The Fed looks set to keep on their path of tightening monetary policy as doubts remain to where the neutral rate is and how much activity is needed to close the gap to prevent the US Economy from overheating. Any hawkish surprises would likely lift USD/JPY through the YTD high.
- Technical Analysis of the Japanese Yen: USD/JPY holds a bullish structure north of 109.97, which was the August low. The intermarket support of higher yields and higher equities on falling volatility seem also to support a weakening JPY.
KEY TECHNICAL LEVELS FOR JAPANESE YEN RATE TO US DOLLAR:
- Overall Bias: Bullish on the bounce above the 3-year trendline, and as long as above August low
- Resistance: ¥113.39, YTD High
- Spot: ¥112.94 per USD
- Support: 110.37, higher-low om September
A bullish bias remains after USD/JPY broke above a three-year trendline and continues to trade strongly in a supportive market. Supportive forces include Japanese equities via the Nikkei 225 that is testing 2018 highs (just like USD/JPY,) alongside the highly correlated (40-day rolling at +0.8921) US Treasury 2yr yield that has risen from 2.58 in mid-August when USDJPY traded at 109.97 to 2.839 today, which is a rise of 25.4bps or 9.8% as the Fed is expected to be more hawkish on an overheating US Economy.
Traders should also note the atrocious bid-to-cover ratio on Monday’s US Treasury 2yr auction. The bid/cover of 2.44 was at the lowest percentile of the last 12 auctions. Such a weak bid-to-cover signals weak demand for front-end US Treasuries that could mean the yield is likely to move higher, and could take USD/JPY higher with it.
Long-term USD/JPY Shows Path of Least Resistance Looks Higher
Chart Source: IG UK Price Feed. Created by Tyler Yell, CMT
The chart above has a clear initial focus on USD/JPY as long as it trades above the September low at 110.37 at 114.47 JPY per USD. Such a move is highlighted above with a highlighted box that encapsulates the highs seen from February 2017 onward. A move to 2017 does not mean the move is complete, but rather, a short-term pull-back may ensure, or it could be a good time to move your stop closer to the trade to lock in some profits if you’re in the trade and it is working in your favor.
The bullish thesis would be invalidated on a break below the September (110.37,) and August (109.77) low. A break below there could mean we have more sideways consolidation to go in a world where any sign of volatility is shortly put out by central banks in fear of another February event developing to a larger degree.
What If JPY Is No Longer The Go-To Haven?
Options data long portends the bias shown by the market to favor JPY strength in periods of global risk off as repatriation flows see the massive stock of institutional Japanese money head back home until the waters calm. However, in 2018, the JPY has not seen the same response to risk-off events as seasoned market participants are accustomed to witnessing.
One common relationship that has broken down of late is EM longs and JPY shorts. It’s safe to say over the last few months that EMFX longs have been largely taken out of their trades, but the JPY has not strengthened in the environment. This could be a removal of a long-term argument for JPY strength and may keep this trade supported further.
Traders who aren’t sure that the US Dollar is the best way to play a weak JPY may want to consider AUD/JPY. If the global risk is on the upside, the analyst pickBullish AUD/JPY on US Dollar Breakdown, Commodity & Chinese Support may prove timely.
More Support for Your Trading:
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 t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.
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