USD/JPY: The main bias remains lower

Technical considerations point lower for USD/JPY. Markets continue to ignore the fundamental factors that favor the US and until that become the basis for comparison the drift down, a combination of the existing trend, stationary Fed rate policy and the interest rate differential, will order trading, according to FXStreet’s Analyst Joseph Trevisani.

Key quotes

“The long-running descending channel remains the overall formation with a general range of 104.50 to 106.00 over the last seven weeks. Wednesday's drop went straight to that 104.50 support which held in trading on Thursday and Friday. With further stimulus a reasonable assumption and limited support beneath 104.50, the immediate prospect is lower.”

“As COVID-19 diagnoses rise again in Europe and the US, there has not been a reversion to the pandemic response exemplified by the peak in the USD/JPY in late March and its steady decline since. The pandemic has ceased, at least for the present, to be a risk motivating factor.”

“Economic statistics and recovery favor the US and the dollar but interest rates do not. Perhaps surprisingly given the Bank of Japan's (BoJ) history, the real interest rate, the base rate minus inflation, is higher in Japan. This a function of Japan's very low rate of inflation.

“In September the BoJ's base rate was -0.1%, as it has been since January 2015. National CPI for the month was flat, leaving the real rate at -0.1%. In the US the fed funds mid-rate was 0.125% (target range 0%-0.25%). However, the Personal Consumption Price Index for the year in August was 1.4% putting the real interest rate at -1.275%. It may seem almost counter-intuitive that a negative base rate could produce a higher return but this fact is no doubt partially behind the yen's recent strength.”