Market News & Analysis

Top Story

USD/JPY bears smelling blood

The US dollar has started the new week on the front foot after being hammered in the last couple of weeks on rising probabilities of a rate cut by the Federal Reserve. As my colleague Matt Weller noted earlier, traders are now pricing in an over 80% chance of a rate cut by the end of July. Despite this, the USD/JPY fell only slightly last week and was up at the start of this week. The safe haven yen is undoubtedly undermined by the ongoing “risk-on” rally – owing to news that the US and Mexico have reached an agreement over migration, allowing the latter to avoid the 5% tariffs threatened by Trump.

However, once the impact of the Mexico news is absorbed, we reckon the UJ will probably decline further and catch down with the falling US-Japan bond yield spreads – especially if Wednesday’s release of US CPI fails to positively surprise the downbeat expectations. The Fed’s U-turn on interest rates has gathered significant momentum over the past few weeks but the dollar has not made a similar move. Yet. But if the slumping US-Japan 10-year yield spread is anything to go by, then the fact this has made a new lower low suggests the USD/JPY could be on the verge of dropping below the January’s flash crash low over the coming weeks.

A potential resistance area to watch is around 109.00-109.15 on the USD/JPY, which was previously support. This area also ties in with the down trend of the bearish channel and the 21-day exponential moving average. Of course, rates need not get there before turning; essentially what we are looking for is a failure to hold above last week’s high at 108.60ish. The first downside target is the liquidity below last week’s low at 107.80, with the ultimate bearish objective being the low beneath the January low at 104.90. However, a clean break above the aforementioned 109.00-109.15 resistance area would probably invalidate this bearish outlook, until rates find stronger resistance at higher levels.

Source: TradingView and City Index

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.