Day four - USD/JPY's aggressive rally

USD/JPY rallies more than expected.

Source: Bloomberg

Having looked at potential long USD/JPY trades at 102.40 on Monday, the pair has rallied more aggressively than expected, hitting a high of 103.84 overnight.

On a broader measure the USD index (a basket of currencies) has pushed to the highest level since 2013. What’s interesting about this is the US ten-year treasury in September was testing 3%, whereas at present the yield is substantially lower at 2.43%.

The key event risk in US trade was the FOMC minutes. They have certainly been digested as hawkish, as you can see not only from broad-based USD strength, but also from the five basis-point move higher in the US five-year treasury. The narrative highlighted that labour market slack had improved more quickly than anticipated, while there were signs they were getting closer to a normalisation in long-term unemployment.

There was also quite a heated debate around the Federal Reserve’s exit strategies. This sets us up for a very interesting September FOMC meeting, especially given the potential for new economic projections and a full press conference from Janet Yellen.

Given the good USD/JPY run, I’m certainly interested in closing the trade idea and locking in profits, particularly with the prospect of Janet Yellen pushing back on market expectations in Friday’s Jackson Hole Symposium (00:00 AEST).

However, rather than close I am compelled by the pair closing above the 61.8% retracement of the January-to-February sell-off at 103.65 (as seen on the chart). With this in mind, I’ll move my suggested stop loss to 103.00 – just under the July 30 high – and maintain a long bias.

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