USD/JPY: headed for a break to 161.8% of May low & 76.4% of the May drop

USD/JPY is up to test the descending channel's resistance at 110.90 with a bid from the lows of 110.34, supported by the 21-D SMA. USD/JPY is now testing key upside resistance with eyes on the 111 handle. 

A lot depends on how the spread plays out between Japanese and US yields. The 30-day log correlation between USD/JPY, 10-year UST-JGB spread remains high (+0.77). Currently, US benchmark yields are at 2.86%, with the range playing out between 2.83-2.86% and up to test the descending resistance on the daily outlook with eyes on 2.88%, 25th June highs. However, there are plenty of Japanese exporters and option-related offers that remain in size above the market and which could hold up the bulls, and or set off a stop run through 110.80 sell orders and the recent highs of 111.13/36. 

All eyes will turn to The North Atlantic Treaty Organization, (NATO):

Meanwhile, a major risk event for the week ahead comes with the North Atlantic Treaty Organization, (NATO), meeting whereby the yen could catch a safe haven bid as we wait to see what Trump will come out with. However, for the meantime, the dollar is under demand on Central Bank divergences following the goldilocks nonfarm payrolls report and repositioning. Another key focus for US markets this week should be June CPI data.

Nonfarm payrolls outcome, (Analyses from Westpac Banking Corporation):

"On the positive side, non-farm payrolls rose more than expected, 213k. Annual jobs growth is only 1.2%, compared to Australia’s 2.5%yr, but the Fed should feel confident that the labour market remains tight enough to not be derailed by steady interest rate increases.

But markets appeared to focus more on the unexpected rise in the unemployment rate from 3.8% to 4.0% as new entrants joined the job hunt and particularly by softer than expected wages growth. Average hourly earnings rose 2.7%yr, the same pace as in May. Wages growth is very similar to 2016: faster than e.g. 2014-2015 but nowhere near the pre-GFC highs above 3.5%yr despite lower unemployment. This leaves markets leaning slightly more towards 1 rather than 2 more Fed rate rises before end-2018: markets imply a 0.35% increase in the funds rate by January." 

USD/JPY levels

Should 110.80 give way, May's 111.39 high and where the 161.8% of May low & 76.4% of the May drop was located could prove to be a hard resistance area. Further out, the 112.30's, (Fibos at 112.22/33) remain key upside targets. Below the 200-D SMA at 110.12, the Tenkan prop is located a cent lower at 109.19 that falls below the 109.36 key June support. 108.10 is the May 29 low.