JPY’s rally still has legs

The Japanese has been rally strongly over the last two weeks as investors continued to discount the Fed’s hawkish stance. USD/JPY broke the 111 support (psychological level and Fibonacci 61.8% on June-July rally) to the downside. The road is now wide open for further decline with the 109 threshold as first target.

The Federal Reserve will wrap up its July meeting on Wednesday with only an updated statement. We will have to wait the September meeting to get new economic forecast and a press conference. Therefore, it will likely be a non-event as Janet Yellen will surely seize the opportunity to play for time, rather than rushing to tighten monetary policy. Yet, the clock is ticking and postponing further the timeframe would send a negative signal to investors. The September meeting will therefore be the next key event.

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In anticipation of this meeting, the market will monitor closely economic data from the US. A reversal in the negative trend of the last few months will quickly trigger into a re-pricing of a solid tightening pace, which would translate into a higher yields and stronger dollar. In the meantime, even though we think that the dollar’s debasement has reached its limit against several of its peers, the Japanese yen still has room to appreciate, thanks to its safe-haven status.