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  • USD/JPY dropped heavily 20 minutes ahead of the London 1600GMT fix from a high of 113.14 to a low of 112.81.
  • USD/JPY fragile around the 113 handle, DXY and US benchmark yield heavy, US stocks better bid.  
  • However, USD/JPY bullish bias persists due to uncertainties and skittish markets.

USD/JPY has been making a case for the upside in a two-week phase of dollar bullishness while the environment for bulls has improved. Risk sentiment has wobbled and we have seen a stock market rout that spells many dangers ahead giving rise to a stampede into the yen as well as dollar-denominated US treasuries with higher yields, (partly driven so by a previous strong US stock market compared to Chinese prior to the rout) – Hence we had seen a very tight range in the pair between mid-Oct to the 29th-Oct.

However, at the start of this week, Trump set out the makings for a possible deal with China –  That could be the foundations for a trade war truce. This has sparked a relief rally in global stocks and hence outflows in the Yen once again, sold in order to buy risk as investors look for a return on their otherwise idle capital – (The gold price dropped from $1243 to $1212 current lows).

While sentiment has improved, financial markets remain skittish, nervous of the many geopolitical risks simmering away on the back burners. Until the climate for a bullish dollar changes significantly, either by way of a declaration of US growth or other economies playing catch up, or a firmer notion that the Fed is indeed well on its way to a pause in its monetary policy of rate hikes, from a fundamental perspective, there remains a bullish bias for USD/JPY.

A case for the downside emerges through populism as the BoJ governor warned

On the assessment of the BoJ on hold for longer, whereby the BoJ has been forced to admit that its 2% CPI inflation target is unlikely to be hit until early 2021, this morning, as analysts at Rabobank highlighted, Kuroda stated that he expects China’s economy to remain on a stable growth path.  

“However, by referring to the “consequences of protectionist moves” in its Outlook, the BoJ is clearly wary about the fall-out from trade wars on the broader global economy. This year the JPY’s function as a safe haven currency has been diluted by the higher returns on offer from the USD. However, the risk of a worsening in the US/China trade war, slowing global growth and the potential for slowing US growth and a plateauing of Fed rates suggest that the JPY could win back some ground vs. the greenback next year.”

USD/JPY levels

USD/JPY is bullish while above the 21 day ma at 112.65 and will remain so even down to the bottom of the range at cloud support of 111.47. However, preferably, the pair needs to stay above the 23.6% retracement of the latest swing low and high at 113.44 or face pressures that will test the commitment of bulls to the cloud support. Bulls will have eyes on the 114.74 recent high.  Analysts at Commerzbank argued that above 114.74 would target 118.66, the December 2016 high. “Failure at the cloud support (111.47) would target the 109.77/85 200 day ma and August low.”