USD/JPY hits higher highs

Japan has taken centre stage in Asia today, producing a huge raft of data, with USD/JPY continuing to produce higher highs.

The pair found good buyers in US trade on the back of better weekly jobless claims and strong holiday sales numbers from US retailers. This naturally impacted the bond market, pushing up yields across the curve, and importantly the ten-year bond is now testing the year’s high of 3%. Higher yields impact currency valuations, so a move above 3% should continue to positively impact USD/JPY.

Japanese data has on the whole added to JPY weakness and the release that really stands out is November national CPI ex-food, which grew at an annualised pace of 1.2%. This was just above consensus of 1.1% and grinds ever closer to the BoJ’s long-term target of 2%. Importantly, if you subtract energy out of the equation, core inflation grew 0.6% and whilst the BoJ look at inflation with energy costs involved, its core inflation that really shows pricing pressures derived more prominently from consumers.

Industrial production grew at an annualised pace of 5%, which is 40 basis points below expectations, while the weekly Minister of Finance (MOF) fund flows showed Japanese investors sold foreign bonds. So after ten weeks of buying foreign bonds (thus creating JPY outflows) we saw investors taking profits on these positions. While buying of foreign asset was never going to go on forever, as long as the US bond market continues to find sellers (yields therefore go up) we won’t see a mass liquidation for Japanese pension funds holdings anytime soon.

Technically the pair can squeeze to 105.50 (the 61.8% retracement of the 2007 to 2011 sell-off), although the heavy bias is to buy dips to 104.80. The triangle break (I have shown the weekly chart) suggests a longer-term target of 110.00 and this remains my 2014 year-end target, although this could obviously be wildly wrong in either direction.


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