Strategy
Buy USD/JPY at 127.50 for 135.70. Stop at 124.80. Time duration expected. 3-6 months
Technical View
After price reached a high of 131.34 on 9 May 2022, price went into a correction. The correction has so far stayed above the previous low of 126.93 as well as the 20EMA line, keeping the uptrend intact. If price stays above the 20EMA, there is a chance that price may test the previous high of 131.34 again. MACD had given divergence warning earlier but the decline could have been the correction predicted by the MACD divergence. MACD has also stayed bullish despite the price decline. MACD continues to hint at a bullish price trend.
Fundamental View
US 10-year Treasury yield rose to a high of 3.04% on 5 May 2022, the highest since 2018. Investors are expecting a rising inflation to fuel the Federal Reserve into becoming more aggressive in raising rates. In fact, investors are pricing as many as 6 hikes for 2022; bring the Fed fund close to 1.9% by the end of 2022 and to 2.8% by the end of 2023. This has resulted in the US benchmark 10-year rising while the Japanese counterpart yield has remains constant, resulting in a wider gap between the two nations’ bond yields.
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 further in 2022 and in 2023. 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.