USD/JPY Forecast: Bullish above 115.45, 25 bps Fed rate hike priced-in

The Dollar-Yen pair clocked a high of 115.50 on Friday before ending the day on a weaker note at 114.78 levels. The non-farm payrolls data released on Friday showed the US economy added 235,000 jobs in February, smashing expectations of 190,000.

The unemployment rate fell to 4.7 percent, and wages grew 2.8 percent from February 2016. The data pretty much confirmed a 25 basis point rate hike this week, despite which the Dollar-Yen pair ended on a weaker note at 114.78. This is because the treasury yields retreated from the session highs in what appeared to be a “sell the fact” kind of a move.

25 basis point rate hike has been priced-in

The 2-year treasury yield rose to 1.388% last week, its highest level since August 2009. The December high was 1.304%. This clearly suggests a short-term (25 bps rate hike move) has been priced-in.

One may look at the 10-year treasury yield (currently at 2.58%) and conclude that the rate hike is yet to be priced-in. This is because the yield is yet to take out the December high of 2.64%. However, that would be an erroneous conclusion because-

• The 10-year yield is more exposed to the rise in the safe haven demand and
• The 2-year yield is more sensitive to the short-term rate hike/inflation expectations

Thus, further gains in the Dollar-Yen pair are likely if the Fed revises its interest rate forecasts higher. A 25 bps rate hike and an unchanged dot plot chart may not be able to push the Dollar-Yen pair to yearly highs around 118.636 levels.

Technicals - Sideways to positive action likely

Daily chart

• The rejection around 115.45 (0.618 Fib expansion) followed by a drop to 114.78 suggests the bullish move that begun from 111.69 (Feb 28 low) has run out of steam.
• Nevertheless, the last week’s bullish breakout from the sideways channel coupled with a bullish RSI indicates the sideways action is more likely to be followed by another leg higher. A daily close above 115.45 would open doors for 116.04 (Dec 30 low) and 116.62 (100% fib expansion).
• Only two consecutive daily close below 113.56 would signal bullish invalidation. Meanwhile, trend reversal is seen below 111.50 levels.

AUD/USD Forecast: Bullish above 0.7604

Daily chart

• Sharp recovery from Thursday’s low of 0.7491 to 0.7576 (Asian session high) suggests the bearish move from 0.7741 has run out steam.
• Still, bulls need to be patient as only a two consecutive daily close above 0.7604 (23.6% of 0.7160-0.7741). The 50-DMA is sloping upwards, thus a break above 0.7604 would be good news for the bulls.
• On the other hand, a failure to hold above 50-DMA followed by a drop below Thursday’s low of 0.7491 would open doors for a sell-off to 0.7450 - 0.74 levels.