USD/JPY Weekly Forecast: The interest rate gap widens
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UPGRADE- Thursday’s close at 123.97 was a seven-and-a-half year high.
- US Treasury rates continue to fuel the dollar’s rise.
- Fed tightening cycle contrasts with BoJ’s status quo.
- FXStreet Forecast Poll sees technical selling pressure down to 120.50.
March was an excellent month for the USD/JPY. The pair gained 5.8% even with a third quarter profit-taking dip in the final week. Treasury yields were the prime factor in the dollar ascent as the 10-year note added 62 basis points to 2.327% last month and the 2-year return rose 85 points to 2.284%. Japanese Government Bond (JGB) yields were essentially flat with the 2-year losing 2 basis points to -0.04% and the 10-year rising 3 points to 0.218%.
These trends continued in April. The US 2-year yield finished at 2.466% on Thursday, up another 18 basis points on the March close and the 10-year ended at 2.665%, higher by 34 points. From the March conclusion to Thursday’s close the 2-year JGB added 1 point in yield to -0.03% and the 10-year improved by 2 basis points to 0.239%. For the USD/JPY, there is simply no competing with these changes in the yield spread between the two currencies.
Treasury yields have been driven higher by a series of comments from several Federal Reserve officials promoting higher rates and a reduction in the bank’s $9 trillion balance sheet, underlining the bank’s new, but apparently serious intentions on inflation. The Fed bond purchase program running for two years at $120 billion a month from March 2020, doubled the central bank’s outstanding assets.
Minutes from last month’s Federal Open Market Committee (FOMC) meeting made the reduction plan concrete.
“Participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate. Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant,” stated the minutes.
Japanese vulnerability to oil price fluctuations is a drag on economic growth. Japan imports nearly all of its energy and GDP and her balance of payments will incur more damage from the 30% rise in Brent than the US will from the 28% increase in West Texas Intermediate (WTI). The 166% increase in Brent from November 2020 is nearly coincident with the long climb of the USD/JPY.
Economic data released this week by the Japanese government was mixed. Labor Cash Earnings and Overall Household Spending in February were better than forecast for the first and worse for the second. The Leading Economic Index for February dropped to 100.9, its weakest level since September. The Eco Watcher Survey, which tracks regional economic trends, was stronger than expected with the Outlook side posting its best reading in four months.
In the US, the March service sector Purchasing Managers’ Index (PMI) at 58.3 was up from 56.5 in February. However, the indexes for prices and incoming business were a source of concern. The Prices Paid Index rose to 83.8, well ahead of the 83.3 forecast and February’s 83.1 score. Except for December’s 83.9 reading, it was the highest cost indicator in over a decade. The New Orders Index, a closely watched gauge of future growth, rose to 60.1 from 56.1, but missed its 64.9 forecast. These two months were the weakest for incoming orders since February 2021.
USD/JPY outlook
The USD/JPY is two decades removed from 125.00. From December 2001 to May 2002 the pair traded from 125.00 up to 135.00 and back. Since then, with the exception of two brief forays in October and November 2002 and two in 2015, June and August, the USD/JPY has not been as high. Last Monday’s brief run to 125.10 was the result of stop-loss executions above 124.75, it lasted less than 15 minutes.
The 8.5% rise in the USD/JPY since March 7 is a response to the widening gulf between Federal Reserve and Bank of Japan (BoJ) monetary policies, (USD/JPY: An old-fashioned yield spread move). Now that the Fed has switched to inflation-fighting and is proposing an aggressive reduction of its balance the gap between the two countries interest rate structure is should continue to move apart, keeping the divergent pressure on the USD/JPY for most of the year. Even the great disparity in inflation rates is unavailing for the yen. Japan’s balance of payments position will continue to deteriorate as long as oil prices remain high, energy imports are paid for in US dollars.
In Japan, the Produce Price Index for March is expected to be unchanged at 9.3% on the year and to rise to 0.9% from 0.8% for the month. This may offer some rhetorical relief for the BoJ but it will not change policy.
Consumer prices in the US for March on Tuesday followed by the Producer Price Index (PPI) the next day and Retail Sales and April's Michigan Consumer Sentiment on Thursday are the major data points. Inflation is forecast to rise to 8.3% from 7.9% with the core rate moving to 6.6% from 6.4%. Producer prices are predicted to rise to 10.5% overall with a decline in the core to 7.9% from 8.4%. From a policy and market perspective higher inflation is already priced. Of more interest and potential for market movement are the Retail Sales figures. If the US consumer begins to cut back on spending the Fed's rate program could become questionable. Sales were slightly weaker than expected in February, and are expected to double in March.
Technical references above 125.00 are scarce. The high in August 2015 was 125.28, that June it was 125.85, neither will offer resistance to a mover higher.
The USD/JPY will take time to establish a base above 125.00 but until the rate picture changes there is little reason to expect a strengthening in the Japanese yen.
The biggest risk is that the BoJ will permit a gradual rise in Japanese interest rates. That has not been an active BoJ approach in over two decades and within inflation still well below its goal seems unlikely.
The USD/JPY outlook is higher.
Japan statistics April 4–April 8
US statistics April 4–April 8
Japan statistics April 11–April 15
FXStreet
US statistics April 11–April 15
FXStreet
USD/JPY technical outlook
The USD/JPY's altitude guarantees a rarefied technical atmosphere. References in the daily charts are from June and August 2015 and unlikely to provide guidance. Last Monday's top at 125.10 was a short-lived reaction and is not a trading guidepost. In the hourly charts bases have been established at 122.50 and at 123.70.
The same levels are pertinent in the 4-hour charts.
The MACD (Moving Average Convergence Divergence) has remained at a multi-year high since March 29. The price-signal gap has narrowed considerably but it is questionable, given the fundamental nature of the USD/JPY support, whether that is a prelude to a cross. The Relative Strength Index (RSI) moved back into overbought territory this week after briefly falling below, but as with the MACD, the strength of the normal selling notion is limited. Volatility in the Average True Range (ATR) has stayed at the highest level in two years. Given the paucity of resistance above a move back above 125.00 will be accompanied by high volatility.
Resistance: 124.67, 1.2510, 125.85
Support: 124.00, 123.70, 123.00, 122.50, 121.70, 121.00, 119.50
Moving Averages: 21-day 121.30, 50-day 117.80, 100-day 116.08, 200-day 113.68
FXStreet Forecast Poll
The FXStreet Forecast Poll recognizes the technical selling likely to materialize after such a sharp move higher in the USD/JPY. Whether this natural tendency occurs depends on US Treasury yields. If they continue to rise, so will the USD/JPY.
- Thursday’s close at 123.97 was a seven-and-a-half year high.
- US Treasury rates continue to fuel the dollar’s rise.
- Fed tightening cycle contrasts with BoJ’s status quo.
- FXStreet Forecast Poll sees technical selling pressure down to 120.50.
March was an excellent month for the USD/JPY. The pair gained 5.8% even with a third quarter profit-taking dip in the final week. Treasury yields were the prime factor in the dollar ascent as the 10-year note added 62 basis points to 2.327% last month and the 2-year return rose 85 points to 2.284%. Japanese Government Bond (JGB) yields were essentially flat with the 2-year losing 2 basis points to -0.04% and the 10-year rising 3 points to 0.218%.
These trends continued in April. The US 2-year yield finished at 2.466% on Thursday, up another 18 basis points on the March close and the 10-year ended at 2.665%, higher by 34 points. From the March conclusion to Thursday’s close the 2-year JGB added 1 point in yield to -0.03% and the 10-year improved by 2 basis points to 0.239%. For the USD/JPY, there is simply no competing with these changes in the yield spread between the two currencies.
Treasury yields have been driven higher by a series of comments from several Federal Reserve officials promoting higher rates and a reduction in the bank’s $9 trillion balance sheet, underlining the bank’s new, but apparently serious intentions on inflation. The Fed bond purchase program running for two years at $120 billion a month from March 2020, doubled the central bank’s outstanding assets.
Minutes from last month’s Federal Open Market Committee (FOMC) meeting made the reduction plan concrete.
“Participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate. Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant,” stated the minutes.
Japanese vulnerability to oil price fluctuations is a drag on economic growth. Japan imports nearly all of its energy and GDP and her balance of payments will incur more damage from the 30% rise in Brent than the US will from the 28% increase in West Texas Intermediate (WTI). The 166% increase in Brent from November 2020 is nearly coincident with the long climb of the USD/JPY.
Economic data released this week by the Japanese government was mixed. Labor Cash Earnings and Overall Household Spending in February were better than forecast for the first and worse for the second. The Leading Economic Index for February dropped to 100.9, its weakest level since September. The Eco Watcher Survey, which tracks regional economic trends, was stronger than expected with the Outlook side posting its best reading in four months.
In the US, the March service sector Purchasing Managers’ Index (PMI) at 58.3 was up from 56.5 in February. However, the indexes for prices and incoming business were a source of concern. The Prices Paid Index rose to 83.8, well ahead of the 83.3 forecast and February’s 83.1 score. Except for December’s 83.9 reading, it was the highest cost indicator in over a decade. The New Orders Index, a closely watched gauge of future growth, rose to 60.1 from 56.1, but missed its 64.9 forecast. These two months were the weakest for incoming orders since February 2021.
USD/JPY outlook
The USD/JPY is two decades removed from 125.00. From December 2001 to May 2002 the pair traded from 125.00 up to 135.00 and back. Since then, with the exception of two brief forays in October and November 2002 and two in 2015, June and August, the USD/JPY has not been as high. Last Monday’s brief run to 125.10 was the result of stop-loss executions above 124.75, it lasted less than 15 minutes.
The 8.5% rise in the USD/JPY since March 7 is a response to the widening gulf between Federal Reserve and Bank of Japan (BoJ) monetary policies, (USD/JPY: An old-fashioned yield spread move). Now that the Fed has switched to inflation-fighting and is proposing an aggressive reduction of its balance the gap between the two countries interest rate structure is should continue to move apart, keeping the divergent pressure on the USD/JPY for most of the year. Even the great disparity in inflation rates is unavailing for the yen. Japan’s balance of payments position will continue to deteriorate as long as oil prices remain high, energy imports are paid for in US dollars.
In Japan, the Produce Price Index for March is expected to be unchanged at 9.3% on the year and to rise to 0.9% from 0.8% for the month. This may offer some rhetorical relief for the BoJ but it will not change policy.
Consumer prices in the US for March on Tuesday followed by the Producer Price Index (PPI) the next day and Retail Sales and April's Michigan Consumer Sentiment on Thursday are the major data points. Inflation is forecast to rise to 8.3% from 7.9% with the core rate moving to 6.6% from 6.4%. Producer prices are predicted to rise to 10.5% overall with a decline in the core to 7.9% from 8.4%. From a policy and market perspective higher inflation is already priced. Of more interest and potential for market movement are the Retail Sales figures. If the US consumer begins to cut back on spending the Fed's rate program could become questionable. Sales were slightly weaker than expected in February, and are expected to double in March.
Technical references above 125.00 are scarce. The high in August 2015 was 125.28, that June it was 125.85, neither will offer resistance to a mover higher.
The USD/JPY will take time to establish a base above 125.00 but until the rate picture changes there is little reason to expect a strengthening in the Japanese yen.
The biggest risk is that the BoJ will permit a gradual rise in Japanese interest rates. That has not been an active BoJ approach in over two decades and within inflation still well below its goal seems unlikely.
The USD/JPY outlook is higher.
Japan statistics April 4–April 8
US statistics April 4–April 8
Japan statistics April 11–April 15
FXStreet
US statistics April 11–April 15
FXStreet
USD/JPY technical outlook
The USD/JPY's altitude guarantees a rarefied technical atmosphere. References in the daily charts are from June and August 2015 and unlikely to provide guidance. Last Monday's top at 125.10 was a short-lived reaction and is not a trading guidepost. In the hourly charts bases have been established at 122.50 and at 123.70.
The same levels are pertinent in the 4-hour charts.
The MACD (Moving Average Convergence Divergence) has remained at a multi-year high since March 29. The price-signal gap has narrowed considerably but it is questionable, given the fundamental nature of the USD/JPY support, whether that is a prelude to a cross. The Relative Strength Index (RSI) moved back into overbought territory this week after briefly falling below, but as with the MACD, the strength of the normal selling notion is limited. Volatility in the Average True Range (ATR) has stayed at the highest level in two years. Given the paucity of resistance above a move back above 125.00 will be accompanied by high volatility.
Resistance: 124.67, 1.2510, 125.85
Support: 124.00, 123.70, 123.00, 122.50, 121.70, 121.00, 119.50
Moving Averages: 21-day 121.30, 50-day 117.80, 100-day 116.08, 200-day 113.68
FXStreet Forecast Poll
The FXStreet Forecast Poll recognizes the technical selling likely to materialize after such a sharp move higher in the USD/JPY. Whether this natural tendency occurs depends on US Treasury yields. If they continue to rise, so will the USD/JPY.
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