USD/JPY: Bias is to sell rallies – OCBC

USD/JPY fell to low of 146.31 yesterday on BoJ report saying see chance of hike this year despite politics. Pair subsequently rebounded. Last seen at 147.64 levels, OCBC's FX analysts Frances Cheung and Christopher Wong note.

JPY weakness to reverse when uncertainty fades

"Daily momentum is showing tentative signs of turning mild bearish while RSI is flat. 2-way risks but retain bias to sell rallies. Support at 146.70 (38.2% fibo retracement of Apr low to Aug high) and 145.90 (100 DMA). Resistance at 148.32 (23.6% fibo) and 148.80 (200 DMA). The LDP election to find the next successor is on 4 October. More details on who the candidates are, and their policy bias should be expected from 22 September, when the leadership campaign starts."

"It is a full-spec vote, meaning that the election is conducted in its complete format. All LDP members – Both lower and upper house will vote and each will have 1 vote. All rank-and-file members (about 1.1mio of them) across the country will also vote but the votes are tallied and converted into the same number of votes as there are LDP lawmakers (about 296 LDP members) in parliament. Near term, political uncertainties in Japan may temporarily hinder BoJ from normalising policy at upcoming meeting on 19 September."

"But JPY weakness (due to politics) should reverse when uncertainty fades. Wage growth, broadening services inflation and upbeat economic activities in Japan should continue to support BoJ policy normalisation, likely at future meetings – they have one meeting scheduled on 30 October and another one in December. Markets yet to fully price a hike. Moreover, Fed cutting rate in due course should also help to bring USD/JPY lower at some point amid Fed-BoJ policy divergence."