Buy USD/JPY at 115.30 for 118.60. Stop at 113.90. Time duration expected. 4-6 months

Technical View

Price moved above 115.50 in the previous week, creating a 5-year high in the process. We are likely to see price continues its rally to the high of 118.60. Stochastic has just crossed over into the overbought zone and is likely to support further upsides in this pair. A strong trend can keep Stochastic in the overbought zone for a prolong period of time. 20EMA is hinting that a strong bullish price trend is likely with its steep slope. MACD is also bullish with both its lines above the zero line. However, MACD may develop a divergence warning. Given the strong bullish trend, we think price should be able to move to the next resistance with divergence warnings developing.

Fundamental View

US 10-year Treasury yield rose above 1.80% to a 2-year high on 10 January 2022 as investors increasing expect a tight labour market and rising inflation to fuel the Fed into becoming more aggressive in raising rates and tapering its balance sheet of US$9 trillion. Recent employment data also adds fuel to expectations that the Fed will raise inflation rate to fight inflation given that a majority of citizen are in employment in the aftermath of the COVID-19 pandemic.

Money market are also pricing in a 25bp rate hike by March 2022, which is earlier than what the Federal Reserve had indicated. The Federal Reserve had indicated that there will be 3 interest rate hikes this year, followed by another 3 hikes in 2023 and 2 more hikes in 2024.

In contrast, the Bank of Japan is likely to keep monetary policy stable in the coming years. The BOJ expects relatively flat economic activity in the near term and CPI holding around zero. That would mean keeping interest rate steady at zero percent. Inflation in Japan is also below the target set by the Bank of Japan. That is likely to result in the interest rate differential between the two countries widening. This is likely to keep the Japanese yen weak against the US dollar.

Japanese investors are sensitive to US Treasury bond yields as the yield on Japanese Government bond is much lower than the yield on US Treasury. This is likely to spur Japanese investors to 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.

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