Strategy
Buy USD/JPY at 115.10 for 120. Stop at 113.30. Time duration expected. 4-6 months
Technical View
Price is trying to move above a recent high at 115.67 and a move above this high is likely to result in a test of 7 January 2022 high at 115.95. There is little price resistance above till 118.65 and the next higher resistance is at 121.30. Given the likely widening of yield and interest rate differential between these two currencies, the long term outlook is likely to be bullish for the US dollar and bearish for the Japanese yen.
Indicators are supporting a rising US dollar against the Japanese yen. 20EMA is rising and is hinting at a bullish price trend ahead. Stochastic is also rising and is just into the overbought zone. Stochastic should be able to support more price up moves in the near future. MACD remains bullish with both its lines above the zero line. MACD remains in a bullish crossover and is hinting at a bullish price trend ahead.
Fundamental View
US 10-year Treasury yield rose to 1.97%, the highest since November 2019, 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 50bp 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. However, market has now priced in a one-in-three chance the Fed might hike by a full 50 basis points in March, and a reasonable chance rates will reach 1.5% by year end. This is double what the Fed had indicated.
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.
