USD/JPY Outlook Rests With Resolution of the 100 Level
- Written by: Gary Howes
The strong rebound in the US Dollar / Yen exchange rate on Friday 5th August suggests an increasing risk of a short-term low being formed in the pair.
Nevertheless, it is arguably too early to rule out an extension of recent weakness to 100.05 owing to prevailing negative momentum in the pair that is yet to be fully discounted.
Indeed, the 100 level remains incredibly important to the USD/JPY outlook it can be argued.
Analysis from Credit Agricole, provided to us by eFXNews, the institutional research providers, suggests that the outlook for Dollar / Yen remains intimately tied to the 100 level as it has both political and technical significance.
Just below 100 represents a more than 50% retracement of the Abenomics rally in USD/JPY and a break of this level could trigger significant stop loss selling.
“We continue to believe that the MoF would likely intervene to sell JPY if USD/JPY breaks 100, in order to smooth its decline. The recent rhetoric from the MoF Vice Minister in charge of currency policy, Masatsugu Asakawa, suggests as much,” says a note from the strategy team at Credit Agricole.
This week, investors’ attention will be divided between FX markets and the Olympic Games.
Since the end of Bretton-Woods, over the approximate two weeks when the Olympics run, the median change in the USD/JPY has been -0.1% according to Credit Agricole analysis.
“So, we do not anticipate much of an impact. Uncertainty about the future of Japan’s monetary policy is leading to increased volatility around JGB auctions. Indeed, JGB yields are becoming a stronger driver of the USD/JPY. So the 30Y JGB auction next week is worth watching in our view,” say Credit Agricole.
Analyst Kit Juckes at Soc Gen is also paying special attention to action in yield spreads.
“The US/Japanese real 10year yield spread moved back out to 50bp after the payroll data, but just eye-balling the yield spread and USD/JPY suggests we’d need a 20bp move up in US real yields to have any chance of seeing USD/JPY 110,” says Juckes.
“My hopes of that happening haven’t revived on these figures, and as for the 50bp move in relative yields that would point the way to USD/JPY 120,” says Juckes.
That’s going to take better US data and a massive change of heart by the BOJ.
Maybe a risk-friendly set of US numbers is enough to keep USD/JPY from breaking 100 for now, but Juckes reckons the most we can hope for is that a 100-105 range is enough to give the Nikkei a bid.