The Dollar-Yen pair surged to a high of 106.94 on Thursday as the rising Treasury yields and the risk-on action in the financial markets kept the American dollar solidly bid.
Markets ignore potential debt concerns
Moreover, Trump is widely expected to announce tax cuts and boost fiscal spending as promised during the campaign. This is expected to boost growth and inflation in the short-run, but at the same time accentuate debt concern. However, in the current era of deflation, markets are more likely to focus on the prospects of high inflation and high growth and ignore potential debt concerns.
No wonder, the Treasury yields are surging. In a way, the entire situation is a boon for the Bank of Japan (BOJ), since the policies it implemented over the last one and half year completely failed to weaken Yen and boost inflation. The rally in the USD/JPY pair takes pressure off from the BOJ.
Profit taking could hurt the pair
The US data docket today is thin with just the preliminary University of Michigan Confidence number due for release. Thus, there is little that could suddenly trigger a trend reversal; however, a minor drop on the back of profit taking is very much possible ahead of the weekend, given the pair has been on a 5-day winning streak.
Technicals - Needs to close above 38.2% of 2011 low - 2015 high
Weekly Chart
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- The current weekly candle looks extremely bullish given the sharp rebound from the low of 101.19 and a weekly close (almost confirmed) above 105.53 (Oct high).
- However, there are key resistance levels, which, if breached would be a sort of icing on the cake for the dollar bulls.
- The above weekly chart clearly shows the pair failed twice in July to hold above 106.64 (38.2% Fib retracement of 2011 low - 2015 high).
- Thus, a weekly close above 106.64 would add credence to the nice rounding bottom seen on the daily chart over the last 3-4 months and would open doors for a breach of the descending trend line (drawn from Dec 2015 high and Jan high).
- A corrective move could play a spoil sport, but as long as the pair stays above 105.53, the odds of an eventual rise to the descending trend line hurdle remain intact.
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