Strategy
Buy USD/JPY at 140.00 for 145.00. Stop can be place below 137.40. Time duration expected is 2-3 months.
Technical View
Price reached a high of $144.99 on the 7 September 2022 and we also a sharp correction in the next few days to $141.50. Stochastic is also in the overbought zone and is declining. This is a sign that the market is in correction after a strong rally since 27 July 2022 to the current high at $144.99. As long as the strong support zone at 139.92 down to 139.35 is not broken, this is likely to be a correction and we are likely to see a resumption of the uptrend back to $145 again in the next few months. This triple support zone is provided by the 20EMA as well as a previous price support. There is also a previous resistance turned support line supporting price. This is a strong support which price may not be able to move below.
While stochastic is hinting at a price decline, both MACD and 20EMA are bullish and are hinting that this correction could be a corrective decline of the recent strong rally to $144.99.
Fundamental View
The USD/JPY reached a high of $144.99 on 7 September 2022 as the U.S. 10-year Treasury yield reached a high of 3.365%. This has helped the greenback strengthened again the rate-sensitive yen. A recent pullback in benchmark 10-year Treasury yield has seen the USD/JPY rate declined to $141.50. We view this drop in USD/JPY as temporary and we are likely to see a rally back to 145 again as the US interest rate is set to rise going into the year-end.
The US Federal Reserve is likely to hike rate by either 75 basis points or by 50 basis points in its 21 September 2022 FOMC meeting. This is likely to see the Treasury yield rise again as well as an increase in interest rate differential between the two currencies, sending the USD/JPY rate higher again.
The US Federal Reserve is also likely to keep hiking rate for the rest of this year as it tries to contain inflation which is running at multi-decade high. This is likely to send benchmark 10-year Treasury yield higher as well as increases the interest rate differential between the two currencies, aiding the US dollar against the yen.
In contrast, the Bank of Japan is likely to keep monetary policy stable in the coming months. The BOJ expects relatively flat economic activity in the near term with CPI holding below the central bank’s target. That would mean keeping interest rate steady at zero percent. That is likely to result in the interest rate differential between the two countries widening should the Federal Reserve continue to hike rate. This divergent monetary policy 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 bond. This is likely to spur Japanese investors to gain higher yields by investing in US Treasury bond. That would result in selling of Japanese yen and buying of US dollar as payment for US bond purchases.