USD/JPY Forecast: Will the bulls erode the falling trend line?
|- The technical charts call for a break above immediate resistance at 110.68 (trendline hurdle).
- Bond markets continue to diverge in the USD-negative manner.
- Bollinger Bands indicate a big move could happen soon.
The USD/JPY jumped to a one-week high of 110.65 on Monday, having found acceptance above the key 200-day moving average (MA).
At press time, the currency pair is trading at 110.40 - still stuck in a narrowing price range as discussed yesterday.
The upper end of the range, i.e. the resistance of the falling trendline drawn from May 21 high and May 16 high is located at 110.68.
Meanwhile, the 200-day MA is stationed at 110.18 and the lower end of the narrowing price range, i.e. confluence of 50-day MA and the rising trendline sloping upwards from the March 26 low and May 29 low is located at 109.80.
The technical picture favors a break above the upper end of the narrowing price range.
Daily chart
The Chaikin money flow remains in the positive territory for the tenth straight week, indicating strong bullish sentiment. Also, it is beginning to rise in favor of the bulls, adding credence to the dollar's solid defense of the confluence of ascending trendline and 50-day MA and the convincing move above the 200-day MA hurdle.
Further, quarter-end unwinding of short trades in JPY crosses could also put a bid under the USD/JPY.
Hence, the pair looks set to take out 110.68 and could rise to 111.40 (May high), although the sustainability of gains remains under question as the bond markets favor the bears.
- The spread between the US 10-year treasury yield and the 10-year Japanese government bond yield is showing no signs of life. At press time, the yield differential is seen at 280 basis points vs June high of 293 basis points and a post-GFC high of 305 basis points seen in May.
- The Treasury yield curve continues to flatten - 10s2s has dropped to a fresh decade low of 32 basis points. Meanwhile, 10s7s stands close to zero and risks inversion. Both developments are USD-negative.
Big move likely to happen soon
Also, the gap between the Bollinger Bands (standard deviation of +2, -2 on 20-day MA) has dropped to 0.011 - the lowest since January 9 and could slip further to 0.008 - the lowest since Oct. 13, 2015. The narrowing Bollinger bands represent the low volatility period and an extended period of low volatility is often followed by a spike in volatility. So, a big move could be seen very soon.
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