This pair is one of the biggest FX disappointments of 2014 so far. It has been stuck in a stubborn range since February, but things could be about to change. It is moving towards the top of its recent range, and Monday’s close above 102.36 – May 13th high – was a bullish development. While we are wary of calling an uptrend quite yet, there is a mixture of fundamental and technical factors that could boost USD/JPY in the short-term including:
US Treasury yields: after falling to a low of 2.40% last week, they have clawed back 16 basis points in 4 sessions, which is a big move for Treasuries. Some are now calling 2.4% a medium-term low for US government bond yields, and if true, this could fuel a USD recovery for the rest of this year.
Nikkei: As you can see in the chart below, the Nikkei and USDJPY tend to move together. After diverging earlier this year, they are back moving in the same direction. This could be good news for the USD bulls since the Nikkei 225 has been following the US market and is one of the top performers in the developed market in recent weeks.
US economy: there are signs that the economy may not be as weak as some fear. After the giant mess that was the ISM release on Monday, which was eventually revised higher, the focus is now on the non-manufacturing report released on Wednesday. The market expects an increase to 55.5 from 55.2 in April.
The technical picture: the close above 102.36 on Monday was a bullish development. This also helped the daily MACD to move above the zero line, which is a bullish trending condition that could open the door to further gains back to 103.02 – the early March high, and then 104.13 – the April high.
USDJPY has disappointed us before, thus we would watch two things:
- The Nikkei – if it starts to falter then we could see USDJPY come under pressure.
- If USDJPY struggles around 103.02 – the May extreme – it may suggest that the bulls are losing faith, leaving USDJPY stuck in its range for another month.
- A story surfaced late last week that suggested BOJ officials are looking at ways of unwinding QE. If this story is backed up by comments from BOJ officials then we could see JPY strength.
USDJPY is on a knife edge; if it can move above the May high then bulls may have something to get excited about. This week’s payrolls report is also pivotal for this pair, and it may not be able to ignore another 200k + reading.
Figure 1:
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