Technical View
From a low made in the beginning of the year, price has moved higher and above the Fibonacci 62% point of the decline from 114.20 to the low at 104.86. This is a hint that the current price advance may not be a correction but rather a reversal price move starting from the low. This is likely to bring price back to the high of 114.20. Price is above the 20EMA which is trending higher. This is another hint of an uptrend. MACD is bullish and moving higher though it is not that strong compared to the previous price peak. Price is likely to progress along the trend channel with first resistance at 112.45. A break of this resistance will target the high at 114.20.
Fundamental View
Last week, a comment by Bank of Japan’s governor Kuroda got us to re-examine our view on USD/JPY. Our examination highlighted 3 key points where Yen will likely remain weak against the USD.
- Bank of Japan would consider loosening monetary policy further if the Japanese economy loses momentum. A week earlier Japan’s GDP came in below expectation raising concerns about the health of the Japanese economy.
A graphic look at the GDP numbers for Japan will explain the concerns. The declining trend that started from January 2018 is not showing any signs of a reversal. It could even go into negative territory. A loose monetary policy has already kept the Japanese Yen weak and a further loosening will definitely weaken the Yen further.
- Optimism of a trade deal between the world two largest economies is reducing demand for safe haven Yen. While a deal has yet to be concluded, there are enough hints from Trump that it is a matter of time and it may not be that far away. That is likely to reduced risk concerns as well as demand for safe haven Yen.
- There is a wide interest rate differential at the moment between US$ and the JPY. This is in favour of the US$ and is likely to keep demand for US$ rather than the Yen. This interest rate differential is more likely to rise than to narrow. Fed’s member Bostic is expecting one rate hike a year in 2019 and 2020. This is more likely to increase the interest rate differential in the US$ favour and keeping the US$ strong and the Yen weaker.
Strategy
We believe Yen will weaken against the US$. We are recommending a buy USD/JPY strategy with a stop at 108.50 and a target of 114.20 at the current price of 110.80