USD/JPY forecast: Yen strength puts 155.00 in focus

The USD/JPY has dropped around 300 pips from its overnight highs in second day of sharp selling. Suspected BoJ intervention and, more likely, expectations of a hawkish BoJ hike have helped to lift the yen across the board. There is also some chatter about the reverse carry trade driving flows back into the yen. The focus will turn back to the US dollar with the release of ISM services PMI later and the August jobs report on Friday. With the Fed and BoJ rate decisions to come towards the end of the second week of September, the USD/JPY forecast will be subject to heightened uncertainty.  

 

Yen rallies, but why?

 

The Japanese yen has emerged as the main story in FX markets today, with the currency sharply higher following an abrupt move during North American trading yesterday. The USD/JPY initially fell from around 159.60 to 158.20 yesterday afternoon, before recovering to 159.00. That sharp decline prompted speculation that Japanese authorities may have intervened once more. There has been no confirmation of that. But since the start of the Asian session today, the pair has fallen in each hour up until the time of writing in mid-day in London.

 

There is little evidence of any further intervention today. The price action itself has been notably smooth rather than the sharp, disorderly move normally associated with official intervention. A rate check remains a plausible explanation, perhaps carried out at the US Treasury’s request, but this too doesn’t explain the orderly decline of the drop.

 

 

BoJ could deliver a hawkish hike

 

Whatever the cause of the yen rally, the move has clearly been strong. Governor Ueda’s comments have reinforced expectations of another BoJ rate increase later this month, while board member Takata has raised the possibility of a move larger than the 25 basis points currently expected. Markets are now pricing around 49bp of tightening by year-end, up around 22bp before the late-July intervention episode. There is some chatter that the BoJ could even deliver a 50 bp hike at its September 18 meeting.

 

Dollar debasement trade is back on?

 

The USD/JPY is also benefiting from a lack of support for the dollar elsewhere. We have seen the likes of AUD/USD, EUR/USD, gold all rebound, with US Treasury yields easing back from yesterday’s highs despite crude oil extending its upsurge amid Middle East hostilities. WTI was trading above $92 a barrel, keeping the inflation backdrop uncomfortable and risk appetite contained. Is this the return of the US dollar debasement trade?

 

Technical USD/JPY forecast and levels to watch

 

The USD/JPY’s broader trend is starting to turn bearish given these big moves. That said, we haven’t had a lower low yet to confirm. That could happen if the 155.00 handle breaks.

 

 

The August low sits at 155.23, while the May low is at 155.03. Thus, a sustained break below 155.00 would strengthen the bearish technical USD/JPY forecast and potentially lead to some follow-up technical selling towards 154.00 and then 153.00.

 

On the upside, minor resistance is seen around 156.67 with the area between 158.00 to 158.900 now marking a major resistance zone. Here, we also have the 200-day average converging. Bullish if we go back above that zone.

 

What else will impact the USD/JPY forecast?

 

With tomorrow’s US jobs report looming, the yen rally has arrived at an interesting moment for dollar bulls. A weak US labour-market reading could provide the catalyst for a decisive break below 155.00, while a stronger report may offer USD/JPY some respite – especially with oil continuing to rise.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R