Day 5: our USD/JPY trade

USD/JPY rallied to a high of 98.33 in the US session.

- Will President Obama agree to an extension or not?

- USD/JPY could rally in the coming weeks

with traders taking heart from a Republican plan to extend the debt ceiling until November 22. This is not only good for the USD as it brings a degree of confidence back, it also modestly increases the perception around the scope for the Fed to taper its bond-purchase programme.

Will President Obama agree to an extension or not?

The US fiscal debate is all over the place. As mentioned, in US trade we heard that the Republicans had put a plan on the table for a six-week debt limit extension, however the real drama is shaping up in Asian trade, with reports in the New York Times suggesting the President had walked away from the deal. We then saw further reports surfacing that the President had neither rejected the deal nor accepted it. USD/JPY fell to 97.92 on the news, but has since re-claimed the 98 handle. We should hear more in the coming hours, but its clear price action will now be driven by headlines.

Technically the pair looks like it can squeeze a little higher in the short term and my bias is now neutral, after it broke and closed above both the September downtrend at 97.78 and the 38.2% retracement of the sell-off from 100.61 to 96.57 (at 98.11). The daily MACD is still below zero, although is starting to trend higher, while the five-day moving average has now closed above the ten-day average, forcing an exit signal.

USD/JPY could rally in the coming weeks

I suggested placing a tight stop above the downtrend and this has been triggered for a small loss and in reality it was a prudent move. Fundamentally I actually feel the pair can squeeze higher over the coming weeks, potentially pushing back to the 100.00 level. My two main reasons for upside potential is firstly the yield differential between Japanese government bonds (JGBs) and US treasuries is becoming quite compelling again (there is now a 203 basis point spread between US ten-year treasuries and 10-year JGBs). Once Japanese institutions feel more confident about the US fiscal situation, we should see these players buy back US assets. Secondly, traders will start selling JPY again in anticipation on the October 31 BoJ meeting, in which there are risks we could see additional action being announced from the central bank.

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