Japanese Yen Outlook: Topside Risks Remain for USD/JPY as Yields Grind Higher
Updated
Tricky and Choppy Backdrop for USD Bulls
Despite the Federal Reserve pivoting to an even more hawkish stance with Chair Powell in effect telling the market, they want lower equity and bond prices, the US dollar has since posted the largest 3-day pullback since March 2020.
A big factor behind this has been the focus on what will happen going forward with China’s zero-covid policy. Rising speculation over China possibly looking to take a step back from zero-covid policy prompted a significant short-squeeze in beaten-down Chinese stocks and other assets exposed to China. However, while these rumours have since been quashed by Chinese officials, various Chinese markets have yet to completely retrace the move and have managed to hold onto recent gains.
For the US dollar this means that further upside is not as straightforward as it has been throughout the majority of 2022 leaving us in a rather tricky and choppy environment As such, we may have to wait for the upcoming US CPI report for a clear direction.
At the moment, there appears to be a decent case for both the USD bull and bear side. Going with the short-term bearish outlook, the China reopening narrative would be a game changer as this would take one pillar of support away from the USD and the fact that the market has not completely reversed the initial gains in light of official pushback is somewhat telling that traders want to play the USD from the short side. EUR/USD has broken above its downtrend and is now testing a key pivot area at the 100DMA (circa 1.0050), should the pair break and close above its 100DMA, this would likely open the doors towards its 200DMA. Meanwhile, given how hawkish the Fed are relative to the rest of the pack, alongside the fact that US growth is holding up well in comparison, it is difficult to see a sizeable sell-off in the greenback and thus dips will continue to find support
EUR/USD chart: daily time frame
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Higher Yields Raises USD/JPY Upside Risk
For those looking at the bullish USD side, the pair to watch would be USD/JPY. The Bank of Japan remains the only dove in a world full of hawks as the bank sticks to yield curve control. What's more, with the US yields continuing to grind higher, the balance of risks remains tilted to the upside, albeit the pair will likely continue to trade within a 145.00-150.00 range. As shown in the chart below, USD/JPY and the US 10-year yield have recently decoupled, which to me makes it difficult to be bearish on USD/JPY and thus would look for a grind higher over the short run. Of course, as I mentioned previously, the big risk event is the US CPI, which will determine the next leg.
USD/JPY (RHS) vs US 10Y Yield
On the technical front, key support sits at 146.00 (prior MOF intervention peak) and 145.20 (Oct 27th low). Should we see a close below the latter, enough technical damage would be done to suggest that a move towards the 100DMA is on the cards to 140.50-141.00.
USD/JPY chart: daily time frame
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