USD/JPY - Back above 114.00, for how long?

  • The pair is stuck in a rut as dip demand remains strong despite the recent decline in T-yields.
  • JPY is on the back foot Asia even though BOJ Summary of Opinions sounded less dovish.
  • The pair needs to break above 114.18.

The overnight recovery in the USD/JPY has been extended in Asia, with pair climbing to a session high of 114.06 levels.

But the question is, will the pair be able to rally well beyond the resistance at 114.18?

To start with, the BOJ Summary of Opinions released today is somewhat less dovish. It says the demerits of additional easing outweigh the merits. This could make it difficult for the USD/JPY bulls to cut through the resistance at 114.18.

However, the 10-year treasury yield added 2 basis points during the overnight trade. Furthermore, the yield may gather upside traction if the China PPI (Oct) betters estimates and puts the reflation trade back on the table. The resulting risk-on action could weigh on the Yen as well.

Focus on tax reforms

A sustained break above 114.18 depends on the tax reform talk. Kathy Lien from BK Asset Management writes, "reports that the Senate won't release its version of the GOP tax bill on Thursday is a sign of the challenges that the tax bill faces, though it was unlikely that the Senate would have shared a version before the House Ways and Means committee finished marking up theirs.  Nonetheless the Republicans want to wrap-up the markup by Thursday, paving the way for a vote next week.  We could still see the dollar extend its gains when the House announces that they've finalized the bill." 

To cut the long story short, an upbeat China PPI may be able to push the pair above 114.18, although it is the US tax reform that could yield a sustanied rally. The spot may fall back below 114.00 levels if the US 10-year yield drops below 2.3 percent. 

USD/JPY Technical Outlook

Jim Langlands from FX Charts writes, "the short term technical outlook also remains unchanged, and the charts look mixed/flat so a fairly nimble stance is required, with further choppy trade either side of 114.00 looking possible over the next couple of days.

On the downside, support will be seen at 113.50, below which could then head back to the session low, to the daily Kijun at 113.20 and then at the Fibo level at 112.95 although this seems unlikely today. If wrong, a sustained break of 113.00 would see us back in the previous 112/113 range, where 112.75 would be the first level of support ahead of 112.30.

On the topside, minor resistance now lies at 114.00, above which could return to 114.35/45 and above, towards the 114.73, 6th Nov high, but above which could see a test of the descending trend resistance, currently at around 114.90. A break of 115.00 would then see little resistance until 115.20 and then 115.50.

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