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Our potential strategy is to look to sell USD/JPY at market (currently 101.45), with a stop at 101.70, and a target of 100. Alternatively we could look to go long on a daily close above the rising uptrend at 101.56.
The pair is in a firm uptrend and after having closed above the daily ichimoku cloud, it looks set for further gains. All short-term moving averages are headed higher, which also suggests the pair is set for further strength. However, aggressive traders could look to sell at spot with a view that the rising former trend will hold.
With the US ten-year bond rising to 2.73%, we feel this is now looking quite compelling to US fund managers, many of which have 2.50% as their year-end targets. Lower US treasury yields will reduce the USD’s attractiveness.
A simple downtrend drawn from the 2007 high intersects at 2.75%, thus this could prove as technical resistance, while the raft of Fed speakers this week could look to push back on the recent move in bond yields, which could cause a modest USD pullback.
On the other side of the coin, we feel traders could look to buy on a daily close (08:00 AEST) above the rising uptrend drawn from the November low , with potential stops at 100.80, with our target 103.00.
On Thursday we get the minutes from the recent FOMC meeting and we would expect these to be hawkish, which would be good for the USD and could push the pair convincingly above the former uptrend. However, it needs to also be remembered that these minutes don’t reflect the strong payrolls report we saw on Friday.
Fundamentally speaking Japan is looking more attractive every day. Inflation expectations, growth, business confidence and manufacturing are all improving and this will encourage Japanese money managers to sell JPY.
Given the improvement in local business conditions, we feel the BoJ will refrain from any new initiatives at this week’s central bank meeting, which could in theory disappoint the USD/JPY bulls.
While we are longer-term USD bulls, we feel the US bond market is looking quite attractive to fund managers at current levels and we could see a renewed appetite to buy (i.e. push down yields), which could push down the USD. With the former uptrend coming in at 101.56, we feel this could offer resistance and thus traders could look to sell at current levels. However, if the improving fundamentals and strong uptrend continues, we would change our short-term bias and look for a re-test of the recent highs.