Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

USD/JPY: Buy Or Sell?

Published 09/10/2018, 08:14 am
Updated 09/07/2023, 08:31 pm

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

After driving USD/JPY to 11-month highs last week, investors took profits in what should have been a quiet trading day. However with US and Canadian markets closed, the thinner liquidity also created an opportunity for larger moves, which was what we saw in USD/JPY on Monday. The selling began at the European open and gained momentum when those unlucky U.S. traders who had to work on Columbus Day joined the market. They took USD/JPY below 113 by lunchtime, which was the London close and only eased up when European traders left their desks. Monday’s sell-off took USD/JPY to the 20-day SMA, which is the first level of support. If USD/JPY holds 112.80 then its back toward 114 for the pair but if this level breaks, the sell could extend to 112.

Fundamentally, nothing has changed in the U.S. economy. This week’s inflation reports are still expected to be strong and the Federal Reserve has one more rate hike this year. However the problems for China and Italy continue to grow, causing risk appetite to sour. Chinese stocks plunged 4% overnight, the yuan weakened and the US Treasury added salt to the wound by expressing their concern about China’s weakening currency, fueling speculation that they could label China a manipulator for the first time since 1994. With all of this in mind, we still think USD/JPY is headed above 115 and see Monday’s move as the first opportunity to initiate longs.

EUR/USD remained under pressure on the back of weaker German industrial production. Economists were hoping that industrial production would rebound in August after falling sharply in July but instead it contracted for the third consecutive month. Despite positive and in some ways hawkish comments from ECB officials, we haven’t seen consistent improvements in Eurozone data. Also, as reported by our colleague Boris Schlossberg, “the concerns over Italian budget crisis have investors in a frenzy despite reassurances by deputy PM Matteo Salvini that the government has no plans on leaving the euro. Italian yields spiked to 4.5% on the benchmark 10 year – a dynamic that is only likely to make it more difficult for the country to rebound from its economic rut. The rise in Italian yields is also likely to affect the ECB, which just saw its balance sheet deteriorate markedly and if these flows persist, it may have to postpone plans to commence the taper despite constant assurances to the contrary.” Technically, EUR/USD is in a downtrend and needs to clear 1.1650 to preclude a moved down to 1.13.

Sterling on the other hand refuses to fall as investors hope for an agreement on the Irish border. This is an important week for the UK – not only will the latest trade balance, industrial production and monthly GDP report be released but EU Chief Negotiator Barnier is scheduled to formally present their “super charged” trade proposal on Wednesday. We’ll have to see how the UK responds but if Monday’s comments are a guide, then acceptance of their offer probably won’t happen this week. According to a UK official, there are many big unresolved issues and if you recall last week, Prime Minister May made it clear that a no-deal Brexit is still in the cards.

Despite the losses in China, the Australian and New Zealand dollars rebounded against the greenback while the Canadian dollar slipped back. No economic reports were released from any of these countries but AUD and NZD should have fallen on the back of the sell-off in Chinese equities. Instead, their recovery tells us how deeply oversold these currencies are. However with the U.S. still targeting Chinese trade, we don’t expect significant recoveries for AUD and NZD. The Canadian dollar on the other hand should rally with the market pricing in 100% chance of a rate hike by the Bank of Canada this month. The Hurricane brewing in the Gulf could also drive up oil prices, which would put additional pressure on the loonie.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.