Key Points
- Concerns over the shape and direction of policy in Japan have sparked Yen’s weakness.
- The policy divergence narrative has shifted, as there are now calls for a more aggressive Fed and less aggressive BoJ.
- Traders should be prepared for a blockbuster week headlined by Friday’s Non-Farm Payrolls.
- USD/JPY trades inside a key resistance zone, and should that break, then there is potential for a surge higher.
Market Overview
Over the weekend, Japan’s ruling Liberal Democratic Party (LDP) and its coalition partner Komeito lost their majority. There are still 22 seats left to declare, but a majority is now not possible after the opposition party, the Constitutional Democratic Party (CDP), won 143 seats.
This has triggered fresh concerns over the shape and direction of future policy in Japan, and currencies do not fare well in uncertainty. As a result, the Japanese Yen experienced a fresh wave of sells this week, and this could continue heading into a busy week in the markets.
Has The Policy Divergence Narrative Shifted?
Not too long ago, the USD/JPY “policy divergence sell” was the trade to be in. However, the narrative has changed as data has rolled in over the past six weeks. The economic data coming out of the US has been a lot stronger than most expected, and as a result, all but ruled out the possibility of large rate cuts this year.
The main reason for the USD/JPY upside has been the rally in long-term Treasury Yields. In fact, the movement in the yield curves has been bear-flattening, which is something you would expect in a “higher-growth, high-inflation” world.
The Bank of Japan will deliver an interest rate decision this week, but it seems nailed on that rates will be held where they are. The data in Japan has not been convincing either, so the markets are expecting a more accommodative approach.
Other US Data To Watch For
This week is stacked with high-impact economic data events. On top of the Bank of Japan interest rate decision, we have continued election races in both countries. It seems as if the markets are pricing in a Trump win.
Furthermore, the US Job Openings and Consumer Confidence report is due today. Tomorrow is the US Gross Domestic Product (GDP), and the Core PCE Price Index will be on Thursday. If you expect a quiet Friday, you would be mistaken as the headline event is due out, US Non-Farm Payrolls. Volatility is promised in the markets this week.
USD/JPY Vulnerable To Surge Higher
As you can see from the chart below, USD/JPY has safely exceeded the 150 mark, a level many thought would be resistance. It is now facing another test, the 61.8% Fibonacci retracement, and a daily bearish order block. Initially, these levels acted as resistance.
However, the price is now breaking above the 61.8%, and moving deeper into the daily bearish order block. The top of this order block is at 155.200. Should this level be broken, USD/JPY may explode higher and move back toward 160.000. The bulls are in control here, and it may be sensible to use the break of these resistance levels as support levels.
Risk Disclosure: The information provided in this article is not intended to give financial advice, recommend investments, guarantee profits, or shield you from losses. Our content is only for informational purposes and to help you understand the risks and complexity of these markets by providing objective analysis. Before trading, carefully consider your experience, financial goals, and risk tolerance. Trading involves significant potential for financial loss and isn't suitable for everyone.
