USD/JPY: Market bullish on trade and Central Bank divergence, eyes on 200-DMA

USD/JPY is currently trading just below the highs of 110.46 at 110.41, up from a low of 109.73.

USD/JPY was stalling at the 110 handle since the 21st Jan with two further attempts on the 23rd Jan and 4th Feb. The bulls finally managed to penetrate the bear's blockade which stripped buy stops all the way to the aforementioned highs scored today. 

Looking around, a number of positive developments tipped the pair over the line. From trade war talks moving forward to good news from Italy's banking sector has buffered risk appetite and has subsequently dented the yen. 

"Banca d’Italia reported that Italian banks reduced bad loans by EUR17bn in December to EUR100.2bn, down 34% y/y. That was the lowest level since July 2011 and helped to support BTPs, with the 10-year yield falling 6.5bps (spread vs bunds 279bps). Equities had a firmer tone in Europe (DAX +1.0%, FTSE 100 +0.8%) but the rally petered out somewhat in the US session," analysts at ANZ Bank explained. 

As for yields, the US 10-yr note is currently up 3bps at 2.66% and has followed the European bond market sell-off, where the UK, French and German 10-year bond yields were all rising between 2-3bps. 

Dollar remains in vogue despite Fed

One of the key observations stays with the divergence between the US economy, China's economy, the fragile backdrop in European markets and a dollar shortfall offshore. This leaves the divergence between the Fed and, say, the BoJ, compelling and so long as the US data continues to impress, (such as the recent jobs data), the dollar should remain vouge, which is only down 1% this year despite the shift to neutral at the Fed. 

Eyes for the rest of the week will stay with Sino/US trade talks that have got underway again in China with Mnuchin and Lighthizer set to join talks on Thursday-Friday. We will also keep an ear t the ground for Fed speak and an eye on CPI and retail sales as key guidance as to the state of the US economy. 

USD/JPY levels

Analysts at Commerzbank noted that the pair is being contained higher in a channel and the top of this is located at 110.71:

"We are currently sitting below the 200 day ma and the October low at 111.28/41. We remain suspicious of the current rally and will attempt short positions. The base of the channel at 108.80 guards the 107.75/50 band."