- USD/JPY is currently trading at 111.81 with a high of 112.24 and a low of 111.62 while the yen has maintained a favouritism following the recent rout in global equities and the mounting tensions over various geopolitical variables which are weighing on investor sentiment.
USD/JPY had been consolidating on the 112 handle in tow stages since the 8th October, once above 112.87 and then between 111.87/112.21 that finally gave way to the bearish pressures down to 111.62 at the start of this week.
“The market tone remains dominant as market participants consider the balance of risk in the aftermath of last week’s turbulence,” analysts at Scotiabank explained. “Domestic risk is limited to the release of trade and CPI data ahead of BoJ Gov. Kuroda’s speech on Friday. Kuroda’s weekend comments underscored the importance of maintaining the yield curve control policy, given that inflation remains well below the Bank’s 2% goal,” the analyst added.
Focus on the dollar
Meanwhile, there are a number of arguments for a softer dollar from here out and the following are a list of 5 reasons that one might take a bearish view, rebutted by bulls at HSBC:
- “Bearish USD argument 1 – Fed rates are near the peak and are already priced in. HSBC pushback – Rates may be moving closer to neutral, but this is not the same as the peak rate. Doubts remain about when and how quickly other central banks will raise rates. Also, the level may matter, not just the rate of change.
- Bearish USD argument 2 – The US economy is set to slow, while Eurozone growth will pick up. HSBC pushback – US growth estimates are being revised upwards, while the Eurozone needs growth to recover just to meet existing forecasts. Survey data in Eurozone remains challenging. The market seems to assume a Eurozone recovery but cannot explain the big growth miss so far in 2018.
- Bearish USD argument 3 – Structural forces point to a weaker USD, overwhelming any cyclical support from higher interest rates. HSBC pushback – Eurozone has its structural frailties too, as Italy’s tribulations illustrate. Internal Eurozone imbalances are difficult to address. Fiscal issues can open the question of whether the EUR is divisible, while the USD is not.
- Bearish USD argument 4 – Emerging markets FX is structurally sound and cheap, with USD weakness the flipside. HSBC pushback – We believe emerging market FX does not offer value and those that are ‘cheap’ reflect their risk profile. Foreigners still own much of the local market, suggesting less scope for a rush back into these currencies. Macro frailties remain.
- Bearish USD argument 5 – The USD has not rallied enough or at all given what should have been supportive developments – this shows it is already expensive. HSBC pushback – The USD has continued to rally on a broader basis, even if this is not fully captured by the USD Index (DXY). The USD is not expensive on our metrics, and has room to catch up with these developments, in our view.”
USD/JPY levels
- Support levels: 111.50 111.20 110.85
- Resistance levels: 111.90 112.25 112.60
“Technically, the pair is firmly bearish,” Valeria Bednarik, Chief Analysts at FXStreet explained. “USD/JPY is accelerating its decline below the 100 and 200 SMA, as technical indicators head south within negative territory, the Momentum after failing to surpass its mid-line and the RSI nearing oversold readings. The 100 DMA stands a few pips below the daily low, around 111.50, providing a strong dynamic support that once broken, should lead to a steeper decline during the upcoming sessions.”
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