- USD/JPY bulls have taken back the baton and the price is now climbing back from the lows reached due to EUR/JPY’s European dive (as a result of weakness in European banks).
- USD/JPY is currently trading at 112.61, rising from a low of 112.30 and a touch off the high at 112.66.
The euro fell from a two-week high on Tuesday in the crossfire of a selloff in European stock markets and nervousness about Italian banks. That dragged on EUR.JPY and subsequently took USD/JPY along for the ride in a risk-off environment.
At the same time, we need to monitor the long position of the dollar going into the Thanksgiving holidays which may mean a further squaring of longs that could subsequently weigh on USD/JPY. The DXY has already started to test below the 96.247 Fibonacci level, a 50 percent retrace of the 94.789 to 97.704 (October to November) rise which is definitely bearish.
However, Sino-US trade relations are likely to support the dollar for the foreseeable future all the while that there are no signs of a solution to Beijing’s and Washingtons dispute – The APEC meetings over the weekend brought a strong indication that it is too early to assume that the end of their trade dispute, as analysts at Rabobank argued: “The downside risks to growth from trade wars are likely to keep risky assets under pressure and this is likely to ensure some support for the USD.”
However, such political unease and sentiment will also continue to play into the yen’s hands as market participants also focus on Brexit developments as well as ongoing trade tensions between the U.S. and China.
Eyes on yields and the Fed
“Lower U.S. Treasury yields are narrowing interest rate differentials in a JPY-supportive manner, however, measures of sentiment are only signaling an incremental rise in the premium for protection against JPY strength,” analysts at Scotiabank pointed out. However, they also noted that the JPY remains vulnerable from a positioning perspective, “given the sizeable speculative bearish short – the largest among the reporting currencies according to data from the CFTC.”
Meanwhile, the Fed fund futures yields have continued to price the chance of another rate hike on 19 December around 65%, but pricing for 2019 and 2020 has fallen. This also plays into the hands of the bears.
USD/JPY levels
USD/JPY has reached the 61.8% target at 112.45 and on continued downside pressure, 111.30 guards the 110.55 2018 peak where a cluster of buy stops are located. On the upside, 112.80/50% Fibo and then the 38.2% Fibo just above R2 are key ahead of 113.30 and 114.20.
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