Strategy
Buy USD/JPY at 113.30 for 116.15. Stop at 111.50.
Technical View
Price broke above February 2020’s high at 112.27 in the previous week and has moved to a high of 114.46 as of Monday 18 October. There is a possible divergence warning from the MACD on the 4-hourly chart, which means price could be near to a short term high. However, the trend remains bullish and we could take the short term correction as an opportunity to enter into the market.
On the weekly chart, the Fibonacci 127% lies at 113.30 and this could be an opportunity to get into the bullish trend. After breaking above the high at 127%, price is likely to proceed higher to test the Fibonacci expansion price target at 116.15. Stochastic is rising and has not yet reached the overbought zone, which is a sign, that the price rally still has room to continue higher. MACD is bullish with both its lines above the zero line. A bullish MACD crossover is also hinting of a bullish price trend ahead. 20EMA is bullish and rising, hinting of a bullish price trend ahead.
Fundamental View
US 10-year Treasury yield rose above 1.60% to a high of 1.607% on 18 Oct. 21, which is its highest since July 2021, aiding the US dollar against the Japanese yen. Japanese investors are sensitive to US Treasury bond yields. The yield on Japanese Government bond is much lower than the yield on US Treasury. Japanese investors would gain higher yields by investing in US Treasury. That would result in selling of Japanese yen and buying of US dollar as payment for US bond purchases.
Crude oil price has been on a rally, rising to a 3 years high. A rise in oil price is likely to lead to inflation, which is likely to lead to an earlier than expected US interest rate hike as well. Last Friday, a market indication of inflation expectations hit the highest since 2005 as an unexpected increase in U.S. retail sales in September added to the inflationary pressure.
The Federal Reserve had in the previous month indicated that asset purchases would be reduced by the end of this year, with market expecting a taper this November. Money market are also pricing in a 25bp rate hike by July 2022, which is earlier than what the Federal had indicated. This is likely to support the US dollar against the Japanese yen.