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Potential USD/JPY trade

With the S&P 500 breaking down and looking bearish, the prospect of USD/JPY weakness is elevated.

USD/JPY
Source: Bloomberg

Yesterday I looked at EUR/JPY, adding to my prior idea of being potentially short NZD/JPY.

It’s worth flagging the fact USD/JPY is now testing the 38.2% retracement of the August-to-October rally at ¥106.80. My preference is to hold off and see how the pair acts around this key level before looking at positions.

Naturally, the bulls will want to see this level hold if the pair is to make an assault at the ¥110.00 level once again. However, market pricing around US interest rates has become much more pessimistic this week and it’s therefore hard to see ¥110.00 as a reality this year.

The market now expects the first lift in the Fed funds rate in September 2015, but if global growth really kicks in, the prospect the Federal Reserve will hold off altogether could actually become a reality. Oil is therefore key and the correlation between lower energy prices and falling inflation expectations is strong.

With the S&P 500 breaking down and looking fairly bearish, the prospect of USD/JPY weakness is elevated. A close below ¥106.80 in the short term could suggest more protracted weakness – a sign the ¥105.00 area could come into play.

USD/JPY
Click to enlarge

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