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XTB TRADEBEAT

USDJPY gains as yields recover

Summary:

  • USDJPY at the crossroads ahead of the key print from the US
  • The pair could see a death cross, bulls need to rely on higher US bond yields

Friday could be a very special day for the USDJPY currency pair. The Chair Yellen left many cards close to her chest during her testimony on Wednesday and Thursday but she made a clear suggestion that inflation could be the key to next decisions taken by the US Fed. Therefore today’s CPI print could have massive repercussions for the US dollar and especially the USDJPY. 

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Bloomberg points out at a possible death cross on USDJPY. Source: Bloomberg 

Let’s start with Bloomberg’s observation that technically the pair is close to forming a 100/200 death cross formation on a daily interval. While we are not big fans of death crosses in general, highlighting the cross among traders could add to a downward potential for the pair. 

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USDJPY needs higher US bond yields to keep advancing. Source: Bloomberg, XTB Research 

However, USDJPY is very sensitive to 10 year bond yields and these have picked up slightly in the US, taking the pair a bit higher today. US inflation data could have a major impact on yields and therefore could influence the pair significantly. When we look at a relationship between USDJPY and bond yields we can see that the latest move has been supported by a shift in yields in favour of the US dollar. However, because the Japanese yields picked up as well, bond spread moved at a slower pace. For that reason one could observe that in order for UJ to move significantly higher, US yields would need to rise considerably, perhaps at least above 2.40% (they are 2.34% now). 

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USDJPY faces the key resistance zone between 114.30 and 115.60. Source: xStation5 

This development would greatly help from a technical perspective. The pair remains in a broad consolidation and a scenario where we could be looking at a large wave 3 is still possible. However for it to materialize, we need to see a decisive break of the 114.30-115.60 zone. It’s not an easy zone to cut through - it’s wide and it has been defended multiple times. It only highlights how relevant today’s report is. Speaking of the report, we will have it by 1.30pm BST, the consensus sees headline inflation cooling down from 1.9 to 1.7% y/y but more importantly sees core inflation flat at 1.7% y/y.

Otherwise the Asian session has been calm. Major indices have been little changed, with Australian ASX (AUS200 on xStation platform) outperforming slightly. The Australian dollar remains the strongest G10 currency taking advantage of good moods and improved iron ore prices (up to nearly $66). Manufacturing PMI from New Zealand declined from 58.2 to 56.2 but it had little impact on the kiwi as the currency gains against the greenback anyway. 

 

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