USD/JPY Forecast: Falling Brexit bets could cap losses

USD/JPY pair fell on Monday to 103.786 and extended losses today to 103.58 levels after minutes from the Bank of Japan May meeting showed the efficacy of QE as measure to reach sustained 2% inflation goal is under question. Effectiveness of QE/negative rates as a measure to reach inflation target has been questioned by markets as well, which is evident from the fact that a move to negative rates in January was met with an across the board surge in Yen. However, losses are being restricted by falling Brexit risks.

Focus on Brexit polls and Yellen testimony

Brexit concerns subsided after opinion polls published over the weekend showed sentiment has tilted in favor of 'Remain' campaign. Fresh polls released today also show ‘Remain’ camp in lead. This is likely to keep investors away from the safe haven assets. However, Nikkei is down 0.8% and that is capping the gains in the US dollar.

The other main event for the day is Yellen testimony. Markets expect Yellen to maintain her cautious stance. As per CME data, markets do not see Fed raising rates this year. In fact, there is a very small probability (about 3% or so) of the Fed reducing rates by 25 basis points in December. If we have Brexit and financial market instability, this 3% probability could easily spike to above 50%, thus pushing USD/JPY pair to 100 or below levels.

Technicals- Falling channel intact, could test 5-DMA

• The daily chart shows falling channel is intact, although the daily RSI is oversold.
• Thus a failure to dip below last week’s low of 103.55, followed by a break above today’s high of 104.01 could see the pair test 5-DMA at 104.45. A violation there would open up 105.55 (may 3 low).
• On the lower side, an hourly close below 103.55 would shift risk in favor of a drop to 103.00. A day end closing below 103.55 would open doors for a slide to channel support seen today at 102.30.

AUD/USD – Bearish calls on Iron ore may hurt Aussie

AUD/USD opened higher on Monday morning on falling Brexit bets and extended gains to a high of 0.7481 levels before trimming gains to end the day at 0.7454 levels. The bid tone remains intact in Asia today with the pair trading around 0.7470 levels. S&P ASX 200 index is trading 0.50% higher, thus sentiment remains in favor of Aussie; however, Iron prices could play a spoil sport.

Iron could be set for fresh drop, Focus on RBA minutes

Iron ore slipped 0.20% to $50.60 per tonne. Commodity is in a bear market for last two years and banks have began questioning the popular opinion that prices may have bottomed below $40 in December. Moreover, Chinese steel production is set to drop even further over the next few months; hence major investment banks are predicting a fresh drop to $40 levels in second half of this year. Bearish iron price forecasts could weigh over the Aussie dollar. Also note, a surge in British Pound and the resulting rally in GBP/AUD on account of falling Brexit fears could weigh over AUD/USD as well. Markets await the release of the Reserve Bank of Australia minutes from its June meeting, where it held the cash rate steady at a record low 1.75%.

Technicals – Bullish break on charts, but...

• Pair witnessed a bullish break from falling trend line on the daily chart, however, prices need to break above 0.7504 (June 9 high). Such a move would add credence to bullish break and open up 0.7600-0.7680 (Mar 18 high).
• However, a failure to take out 0.7480 (yesterday’s high) followed by a break below 0.7450 (38.2% of 0.6827-0.7835) would open doors for a slide to 100-DMA at 0.7408 levels.
• On a larger scheme of things, a day end closing above 0.7504 is required to signal bearish invalidation.

NZD/USD – Eyeing channel resistance

• NZD/USD pair surged on Monday, clocking a high of 0.7130 and ending the day at 0.7119 levels. Pair remains on the front foot around 0.7120 levels today.
• An attempt could be made to take out the channel resistance seen at 0.7154 levels, however, only a day end closing above the same would open up 0.7250-0.7315 (May 13, 2015 low).
• On the other hand, failure to take out channel resistance could expose support at 0.7054 (May 3 low). A day end closing below the same would signal a short-term top is in place and may yield 0.6883 (Dec 29 high) in near future.