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  • USD/JPY is sitting pretty around the 114  handle  between a range of 113.68 and 114.06 with traders on the sidelines waiting for confirmation of either continuation or pull back.  
  • So far, for the start of the week, the outlook remains comfortably positive for the dollar bulls although the DXY is at critical levels on the 95 handle in technically overbought territory according to RSI 14 that peaked at 78.66.

With respect to risk sentiment, there is plenty out there simmering away, although the US benchmarks and European bourses are taking things their stride again today. The DJIA and S&P 500 are near record highs  after the U.S. and Canada reached a last-minute deal to revise the North American Free Trade Agreement.  

US yields are favourable above the 3% mark in the 10-year benchmark US T-notes, especially when taking into account the IT-DE, and DE-US spreads with the latest upset in European politics. Italy has been a driving force of markets since the Government announced its 2.4% budget deficit agreement which is likely to raise concerns over the contagion risks to peripheral markets within the EZ – ultimately weighing on EUR/JPY recovery attempts (currently printing long outside upside-wicks on the 4hr Japanese candlesticks, (bearish)). The cross formed a top at the 133  handle  and is making a constructive  case for the downside on a break of 131.20 recent lows.

A case for higher USD/JPY

“The market tone is likely to remain a headwind (for yen) as interest rate differentials widen in an environment of broad-based risk appetite””Japan’s Nikkei has climbed to a fresh multi-decade high.  Labor  cash earnings are released Friday and there are no scheduled BoJ risk events this week,” analysts at Scotiabank argued.

NAFTA (2) optimism to morph into US/China trade dispute negativity

However, slowing the process, the yen  was soft on the release of the Tankan Manufacturing and Non-Manufacturing surveys for Q3 that both fell short of expectations and US  manufacturing was mixed today. However, despite the decline in the September ISM reading, it remains close to a 14 year high,  Joseph Trevisani, senior analyst at FXStreet explained, adding that  Manufacturing and factory employment ‘will continue their substantial contribution to US economic growth in the fourth quarter.’ And on the recent optimism in NAFTA, Joseph argues that “While the new US, Mexico and Canada trade deal does not directly affect the American dispute with China it underlines how difficult it will be for Beijing’s to replace access to US markets.”  

USD/JPY levels

USD/JPY made13-month highs here and while above the  200-WMA, 61.8%  fibo  and monthly Cloud top, the bias is bullish. A subsequent correction of the recent rally may, however, play out first of all where the 161.8%  fibo  at 114.03 was traded earlier. The new range could now be between there and the 50% fibo at 113.30, (rapidly ascending daily Ichi  tenkan) and the potential extension towards a longer-term target to the 2017 high, Nov  6, at 114.74 – (114.07 is the high Nov 9, ’17, then 114.34 Nov 7).  

Analysts at Commerzbank  note the TD resistance at 114.31 and are allowing for gains to the 2017 high at 114.74:

“Minor support sits at the 113.18 July high and the accelerated uptrend at 112.87 and while above here the market is immediately bid. We look for dips lower to be contained by the 111.83/58 late August high and 55 day moving average. Uptrend support lies at 111.120. Above 114.74 would target 118.66, the December 2016 high.”