USD/JPY forecast: All eyes on US jobs with CPI next week – FOREX Friday

The NFP arrives today with the odds of a rate hike from the Fed slipping back to around 50% and correspondingly the dollar sold off again yesterday. That was due to comments from Fed’s Waller who said next week’s CPI could determine whether he votes for a hike or hold. He was thus a lot less hawkish than the Fed Chair Kevin Warsh. Risk assets rallied as the dollar sold off. All eyes are now on jobs report, as well as crude oil prices today. If oil goes up again heading into the weekend, I’d expect bond yields to follow suit. That, in turn, could hurt risk appetite again. But despite everything that’s been happening, markets once again managed to rebound yesterday after every bearish attempt to drive stock prices lower. Today, though, that could change. In FX, the USD/JPY is clearly the pair to watch following the big moves in the last couple of days.

 

What to expect from the NFP today?

 

As for NFP, expectations are for only a +55k print following last month’s surprise -23k reading. Anything stronger, accompanied by a rebound in oil prices could send the dollar higher again. In that case, the USD/JPY could climb back towards the 158.00 area once more. But if the data is weaker than expected, then once again the likes of the AUD and NOK could outperform.

 

There has been lots of mixed signals in the markets this week, with no clear directional bias. It has made trading all the more difficult for swing traders, though it has undoubtedly been great for short term price action and trading.

 

Ahead of jobs report, the dollar is consolidating following yesterday’s drop, with many analysts attributing the decline to Waller’s dovish remarks. I’d be careful to not read too much into that. If crude oil prices spike again given the situation between US and Iran ahead of the weekend, the by default the dollar could find renewed support.

 

USD/JPY forecast: What now after the big yen rally?

 

The Japanese yen has weakened so far today after it suddenly become the main story in FX markets. Traders are no doubt taking profit ahead of the upcoming US jobs report, after the USD/JPY dropped around 300 pips on Thursday from its session highs, in what was the second day of sharp selling in the pair.

 

Will we see further weakness today, or will the dollar buying re-emerge? Well, to some degree that depends on how hot or weak the jobs report is going to be. It will also depend on oil prices, as well as any further intervention from Japanese authorities.

 

So, what exactly drove that sharp move in the yen?

 

Well, there has been plenty of speculation about intervention by Japanese authorities. On Wednesday, the USD/JPY dropped sharply in a sudden move, from around 159.60 to around 158.20, before recovering towards 159.00 handle. That immediately raised the possibility that the Japanese authorities had stepped into the market again.  But there has been no confirmation of intervention, and Thursday’s price action looked quite different. The decline was remarkably smooth, with USD/JPY falling almost every hour since the start of the Asian session, until the European close. That is not normally what you would expect from official intervention, which tends to produce a much sharper and more disorderly move.

 

Hawkish BoJ expectations and reverse carry trade

 

Another reason behind the big yen recovery may actually be expectations of a much more hawkish Bank of Japan. Governor Ueda’s recent comments have reinforced expectations of another rate increase this month, while board member Takata has even raised the possibility of a larger move.

 

Markets are now pricing around 50 basis points of tightening by the end of the year, compared with roughly 20-23 basis points before the late-July intervention episode. There is even some speculation that the BoJ could deliver a 50 basis point hike at its September meeting.

 

We also have to consider the possibility of a reverse carry trade. As expectations for Japanese rates rise, investors who had borrowed yen to buy higher-yielding assets elsewhere may start unwinding those positions, creating demand for the Japanese currency.

 

That said, there has been little evidence of this so far. 

 

USD/JPY forecast: technical analysis

 

From a technical analysis perspective, the USD/JPY is now starting to look a bit more bearish, but we don’t yet have confirmation of a trend reversal. 

 

 

That confirmation could potentially come with a sustained break below 155.00 on the USD/JPY. That’s because we have a couple of lows in close proximity of this psychological handle. The August low is at 155.23, while the May low is around 155.03.

 

Thus, a clean break below 155.00 would create the first major lower low and violate this long term bullish trend of higher highs and higher lows. 

 

If 155.00 handle breaks, then that could open the door to further technical selling towards 154.00 and potentially 153.00.

 

On the upside, 156.67 is now the first resistance level to watch. Above that, the 158.00 to 158.90 region, which was a prior support zone, could now become a major resistance zone.  Interestingly, the 200-day moving average also converges around that area.

 

A move back above that zone would therefore weaken the bearish outlook.

 

All eyes on NFP with US CPI, FOMC and BoJ to come

 

A much weaker than expected labour-market reading could provide the trigger for the USD/JPY to break decisively below that 155.00 handle. 

 

But if the US jobs data comes in stronger than expected, or oil prices spike higher again, or a combination of the two, then the dollar could find renewed support.

 

And with CPI to come next week, plus both the Federal Reserve and Bank of Japan meetings are due in the following week, expect increased volatility in the USD/JPY forecast and direction in the near term.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R