Will the USDJPY Continue to Rally in the Week Ahead?

Key Points:

• Ongoing debate over Japanese “Helicopter” Money.

• Downside risks continue to dominate.

• Japanese CPI and US FOMC Decisions likely to be the risk events.

The venerable Dollar-Yen has been relatively bullish over the past week as the US Dollar was broadly stronger and took the pair higher to challenge the cluster of resistance around the 106.78 mark.

However, despite finally seeing some Yen depreciation there is plenty of potential volatility on the way as capital markets start to take a “will they, or won’t they” view of monetary stimulus for the flagging Asian nation. Subsequently, we review what happened to the pair late last week and what is potentially on the horizon for the embattled Yen.

Last week was relatively positive for the USDJPY as the pair rose steadily to close the week out around the 106.17 mark. A broad sentiment swing towards the greenback saw it rise against the Yen with the stronger than expected US Unemployment Claims and MARKIT Flash PMI results at 253k and 52.9 respectively adding to the buying. However, there is mounting speculation that the Bank of Japan will look to ease in the near term with Kuroda suggesting that, although he sees Japan in a gradual recovering phase that some stimulus options are still available to the central bank. Subsequently, many within the market are looking for some form of helicopter money in the medium term from the BOJ.

The week ahead is likely to be busy as a slew of Japanese data, along with the US decision on interest rates, are due out. In particular, the Japanese CPI will be closely watched given the previously poor showing of -0.4% y/y. In addition, the US Federal Reserve is likely to also weigh in and any dovishness could subsequently see the pair decline.

From a technical perspective, the pair remains beset by the cluster resistance just above it at 106.78 which has largely capped its moves. In addition, the RSI Oscillator is nearing overbought levels which may predispose it for a correction in the coming days.

Regardless, our bias remains initially neutral given the risk of a trend reversal. A concerted breach of the 107.48 point would need to occur to cement a bullish short term bias. Support is currently in place for the pair at 103.54, 99.95, and 98.98. Resistance exists on the upside at 106.78, 110.16, and 111.86.

Ultimately, the bearish trend line still largely remains in place for the currency and unless a concerted breakthrough of the 106.78 resistance cluster occurs, a recommencement of the decline is likely to occur in the medium term. However, there is plenty of risk with the current histrionic policy of the key Japanese government institutions. Subsequently, any form of expanded fiscal or monetary stimulus is likely to have a strong impact on Yen valuations.