Market Analysis

USDJPY: Yen Bears Should Proceed With Caution?

With Japan closed Monday for a public holiday, it won’t be Tokyo that sets the tone for USDJPY this week.  As traders formulate their trading strategies, a number of factors may influence their thinking. First off, last week’s escalation in the China-US trade war didn’t seem to trigger a renewed bout of risk aversion that might ordinarily be expected to lend itself to ‘safe haven’ yen strength. Perhaps that was because markets chose to put an optimistic gloss on the fact that the latest US tariffs on an additional USD200 billion of imports from China were levied at 10 percent (until the end of 2018) rather than the originally mooted 25 percent. Whatever the reason the yen traded weaker last week against not only the USD but also currencies such as the euro (EURJPY) and the Australian dollar (AUDJPY). Looking ahead, the market fully expects the Fed to raise US interest rates on Wednesday while knowing that the Bank of Japan remains resolutely ultra-accommodative. Such a combination of factors could provide a tailwind for yen weakness but JPY bears should remain conscious of the fact that although USDJPY rose last week it didn’t breach 113.00, let alone the July 19 high of 113.18. Beyond that, as analysts at IFR highlighted on Friday night in New York, is the 200-week moving average at 113.27 which might prove pivotal. Of course, there’s always the possibility that a conclusive break above 113.27 could, from a technical basis, open up a move to the high 114s but it might not be plain sailing. As yen bears found to their cost in July, having attained a 113 handle, a further move higher in USDJPY failed to materialize. A dip below the 10-day moving average, currently 112.10, might make some yen bears a trifle nervous.

by Neal Kimberley, External Currency Analyst