Japanese Yen Talking Points

USD/JPY breaks off last week’s series of lower highs and lows to largely reflect the rebound in US Treasury yields, and the Federal Reserve’s interest rate decision could lead to an advance to short term of the exchange rate, because it seems to be reversing. from the monthly low (134.70).

USD/JPY Reverses Ahead Of Monthly Low With Fed Rate Hike At Hand

USD/JPY appears to be stuck in the monthly range as Bank of Japan (BoJ) stick to the Quantitative and qualitative easing (QQE) pprogram with Yield Curve Control (YCC), but the exchange rate could continue to follow the positive slope of the 50-day SMA (133.68) while the Federal Open Market Committee (FOMC) is expected to propose another rate hike of 75 basis points.

Diverging trajectories between Fed and BoJ should keep USD/JPY afloat as president Jerome Powell and Co. are showing greater willingness to implement a restrictive policy, and the exchange rate may stage another attempt to test the September 1998 high (139.91) as long as the FOMC stays on track to enact higher interest rates through the rest of the year.

However, the threat of a recession could cause the FOMC to end its bullish cycle as the central bank tries to achieve a soft landing for the US economy, and a change in direction from the Fed could produce a bearish reaction from the US dollar if the central bank seeks to keep the benchmark interest rate at a neutral level for the rest of the year.

In turn, the Fed policy outlook could ultimately influence USD/JPY as the BoJ remains reluctant to shift gears, but the tilt in retail sentiment looks set to persist as traders have been sharp short on the pair for most of 2022.

The IG Customer Opinion Report shows 32.87% of traders are currently long fillet USD/JPY, with the ratio of short to long traders upright at 2.04 to 1.

The number of net-long traders is 0.27% lower than yesterday and 17.20% higher than last week, while the number of net-short traders is 8.37% higher than yesterday. yesterday and 13.03% lower than last week. The jump in net buying interest helped ease crowding behavior as 28.86% of traders were net long on USD/JPY last week, while the lower position at the net sale occurs while the exchange rate stops last week’s series of lower highs and lower lows.

That said, USD/JPY could see a bigger advance over the next few days as the FOMC is expected to propose another 75 basis point rate hike, and the exchange rate could stage another attempt to test the September 1998 high (139.91) as it seems to be reversing ahead of the monthly low (134.70).

USD/JPY Daily Rate Chart

Source: Commercial view

• USD/JPY breaks last week’s series of lower highs and lower lows as it holds above the monthly low (134.70), and the exchange rate may continue to trend higher as the 50-day SMA (133.68) reflects a positive slope.
• Lack of momentum to break/close below the 135.30 (50% extension) could push USD/JPY back above the 137.40 (61.8% extension) to 137.80 (316.8% extension) region, with a break above the monthly high (139.39) carrying the September 1998 high (139.91) back on the radar.
• However, the inability to defend the monthly low (134.70) can lead to a test of 50-day SMA (133.68)with the next area of ​​interest around 132.20 (78.6% retracement) to 133.20 (38.2% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong