USD/JPY Review: broke up out of the 18 month-long channel pattern onto 112 handle

  • The yen needs to be softer in order to compete with its neighbours in exports as trade war fears escalate in the region. 
  • The dollar is firmly bid on the back of trade war angst as markets decide that Trump is not bluffing on threats to increase tariffs on an additional USD200b on Chinese products.

USD/JPY is trading at the highest levels since January earlier this year and has made a session high on Tokyo of 112.11, falling just shy of the NY high of 112.17. The dollar is firmly bid on the back of trade war angst as markets decide that Trump is not bluffing on threats to increase tariffs on an additional USD200b on Chinese products. It appears obvious that US equities are holding up far better than most other regions, and thus investors are backing Trump as playing the stronger hand - dollar is a proxy to this scenario, benefiting from the softness in the Chinese yuan, ( -0.7% for the onshore yuan and -1.1% for CNH - CNH is on track for its largest daily fall since August 2015).

"This will, of course, generate discussion about China using a weaker currency as one tool of retaliation against the US. Chinese officials on Wednesday pledged retaliation if the US proceeded with the threatened tariffs, but did not specify what China might do," analysts at Westpac explained. 

Yen breaks lower in 18 month-long channel pattern, dollar surges

Meanwhile, despite the risk-off environment, USD/JPY  broke up out of the 18 month-long channel pattern and climbed from 111.00 to 112.17 and made the highest level since January. The yen needs to be softer in order to compete with its neighbours in exports as trade war fears escalate in the region. 

US 10yr treasury yields climbed from 2.92% to 2.86%, before slipping again late NY to 2.84%. At the same time, and ahead of the US CPI data tonight, US PPI was firm and making for a positive foundation for the inflation figure on both a monthly and yearly basis. The Fed fund futures yields continued to price 1 ½ more hikes in 2018. DXY ranged between 94.0910-94.7690 and traded at the top of that range for the best part of the NY session.

  • Japan's Itoh: BoJ a long way away from reducing monetary policy easing

USD/JPY technical analyses

Valeria Bednarik, chief analyst at FXStreet explained that the pair holds above the 112.00 level with technical indicators heading sharply north, entering overbought levels almost vertically, in line with additional gains ahead: "In the same chart, the 100 and 200 SMA are finally gaining modest upward slopes, but are now too far away from the current price to be relevant. A strong static resistance comes now at 112.30, with a break above the level exposing January's high at 113.38."

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