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USD/JPY Analysis: Further gains likely this week

2024-04-16

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USD/JPY could rise further this week for two reasons: continued U.S. economic exceptionalism, limiting the risk of Bank of Japan intervention or the Fed stepping up bets on rate cuts, or a sharp escalation in geopolitical tensions in the Middle East, which could trigger The move was sharp and led to the unwinding of Japanese yen carry trades.

This week's calendar is dominated by secondary U.S. data, with retail sales, housing starts, building permits, industrial production and jobless claims being the only data worth watching. Perceptions of the U.S. economic trajectory will be difficult to radically change.

If USD/JPY continues to rise amid weaker U.S. economic data, the threat of intervention from the Bank of Japan will be amplified, providing Japanese policymakers with evidence that the rise is driven by speculative forces. If these data continue to be impressive, it will weaken the case for intervention.

The lack of first-line data will also make it difficult for the Fed to intentionally reverse the easing of rate cut pricing since the start of the year, keeping the yield differential between the United States and Japan near 2024 highs. Likewise, despite a schedule of 15 Fed speakers, the lack of new information suggests there may be little deviation from the prevailing view that there is no rush to cut rates.

A continued rebound in the U.S. economy may reduce the risk of a squeeze on speculative short yen positions, which, if that happens, could trigger a sharp correction in USD/JPY.

Is geopolitics a threat to USD/JPY gains?

Risks from changing sentiment on the U.S. economy have largely been put on hold, suggesting that geopolitical developments may play a larger role in determining the direction of USD/JPY in the coming days, especially if the situation escalates further.

In the event that tensions are similar to now or ease, it would maintain safe-haven bids for the dollar without causing significant damage to the U.S. economy or interest rate trajectory, which would point to the upside for USD/JPY.

However, if the conflict escalates intentionally, safe-haven inflows into the U.S. dollar may be replaced by carry trades involving the unwinding of Japanese yen positions, leading to a rapid strengthening of the Japanese yen, as has been seen during other periods of ongoing market turmoil.

Of all the considerations discussed, this outcome appears to be the biggest threat to the bullish USD/JPY outlook, rather than the risk of Bank of Japan intervention.

USD/JPY has good upward momentum and no major risk aversion events have occurred

It’s been over a week since USD/JPY surged to a new 34-year high above 152, suggesting the pair may be breaking out into a new higher range. The longer the dollar stays above this key level, the more likely traders and policymakers will be to accept it, especially if it doesn't have any adverse market or economic consequences.

Aside from Friday's inflation report (which rarely deviates from consensus), there is little on the Japanese calendar, so it is too early to draw any meaningful conclusions about the impact of the yen's recent weakness on the Japanese economy. morning.

With tensions in Israel not escalating following last weekend's Iranian attack, and Japanese officials' statements remaining verbal and limited, it was not surprising that USD/JPY was higher on Monday, approaching 155, as many were expecting above 152. The first upside target after. Over 160 would be the next target, a level that the pair did a lot of work on either side of in the early 1990s.

On the downside, USD/JPY attracted buyer power as it fell below 153 to 152.65, making it the first support level to consider. Further down, 152 will provide support given the time it spends below this line.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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USD/JPY Analysis: Further gains likely this week

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