Is the USD/JPY Finally Ready to Break Higher?

Fundamental Forecast for Japanese Yen: Neutral

• US Dollar attempts break above critical resistance versus Yen only to reverse sharply lower

• We’re watching US Treasury Yields and Japanese data to gauge whether the pair breaks higher

• For real-time updates and potential trade setups on the Japanese Yen, sign up for Analyst on Demand

The Japanese Yen finished the week almost exactly where it began, but an impressive Dollar surge leaves the USDJPY exchange rate at major technical levels. Might this be the week we finally see a major break in the Yen?

The USDJPY made a surge above major psychological resistance at ¥99 only to stage a remarkable turnaround and fall towards support. It took a sharply better-than-expected US Nonfarm Payrolls report to send USD yields sharply higher and push the Dollar/Yen exchange rate back towards its peaks. Yet the fact that it was unable to break sets the stage for a potentially significant week of volatility ahead.

Top Japanese event risk will come in the form of Japan’s 3rd Quarter GDP growth figures, and any major surprises could put pressure on the domestic currency.

The Yen has gone almost nowhere versus the US Dollar as relatively steady monetary policy expectations for both the US Federal Reserve and the Bank of Japan keeps the yield-sensitive currency similarly stable. Yet there’s little secret that Japanese Prime Minister Abe and BoJ Governor Kuroda have made it a priority to keep policy as loose as possible in a bid to fight deflation and boost economic growth.

Thus we look to upcoming GDP figures to gauge whether the so-called policies of “Abenomics” are taking effect and—more importantly—whether the BoJ is likely to keep current Quantitative Easing measures unchanged through the foreseeable future.

Economic event risk is comparatively limited for the US Dollar this week, but that hardly rules out further Greenback volatility. On Thursday the US Senate Banking Committee will hold a confirmation hearing for nominated Fed President Janet Yellen. And though most expect that the confirmation will go through, any surprises or difficulties could shake market confidence and force important US Dollar volatility. Reactions in US Treasury Yields and Fed rate expectations will be especially relevant for the yield-sensitive USDJPY exchange rate.

The stage is set for another showdown on the Yen. It finished the week almost exactly at critical resistance of ¥99.00, and a second failed attempt at a USD break higher would leave our trading bias to the downside. We would need a daily close above 99.40 to confirm a break of major technical resistance. - DR

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