Sat, Oct 23, 2021 @ 00:44 GMT
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Currency Pair of the Week: USD/JPY

This week be an event packed week for the US Dollar.  Not only will the US be releasing important monthly economic data such as Durable Goods Orders and Core PCE, but there are other important issues for the US Dollar to watch as well.  First of which will be the developments regarding last week’s FOMC Interest Rate Decision meeting.  Members noted that moderation in bond buying may soon be warranted.  Powell went further during his press conference by saying that he feels goals have been met to taper and that tapering could be finished by mid-2022.  This sent the US Dollar and US yields higher.

On Tuesday, both Fed Chairman Powell and Treasury Secretary Yellen will testify in front of the Senate Banking Committee.  In US politics, Democrats and Republicans will be fighting this week over the infrastructure package, raising the US debt ceiling, and the possibility of a government shutdown.  Democrats have suggested a stopgap measure to extend it until December.   This would give them more time to figure out a long-term plan.  Thus far, Republicans have yet to reply.

Japan’s LDP will decide on will be the new Prime Minister this week.  Taro Kono, who oversaw the vaccination rollout, appears to have the upper hand.  Kono is likely to bring with him a JPY 30 trillion ($270 billion) fiscal stimulus package.  In addition, Japan will also release Retail Sales and Industrial Production and Unemployment this week, but the most important report will be the Tankan Large Manufacturers Index for Q3.  In Q2, the index jumped from 5 to 14 amid improving sentiment due to the recovery from the pandemic.  Expectations for Q3 are like that of Q2.

However, US interest rates have been the main driver of USD/JPY recently.  As we discussed in the Chart of the Week in last week’s Week Ahead piece, USD/JPY has a high correlation with 10-Year US Yields.  On a Daily timeframe, the correlation coefficient is +0.82.  Readings above +0.80 or below -0.80 have strong correlations .  So, for example,  if US 10-Year Yields move higher, based on the current correlation, so should USD/JPY.  Notice that as yields are moving higher (having recently tested the 1.50 level) USD/JPY has broken above horizontal resistance at 110.92.  The next resistance is at the Jul 2nd highs of 111.65.

Source:  Tradingview, Stone X

On a 240-minute timeframe, the correlation coefficient is even higher at +0.96!  For reference, a reading of +1.00 is a perfect positive correlation, meaning that USD/JPY and US 10-Year Yields move together 100% of the time.  +0.96 is pretty close!  If yields pullback, based on the current correlation, USD/JPY should pull back with them.  Horizontal support sits at 110.47 and then 110.08.  Notice as well that the RSI is in overbought territory, indicating USD/JPY may be ready for a pullback.

Source:  Tradingview, Stone X

So where does US 10-Year yields go from here? They began the week moving higher but ran into a brick wall near the psychological round number resistance level of 1.50, horizontal resistance at 1.53 and the 61.8% Fibonacci retracement level from the highs of March 30th to the lows of July 20th, at 1.582.  If yields can break above, there is horizontal resistance at 1.594 and 1.704 before the March 30th highs at 1.774.  If yields do move higher, based on the correlation, is seems that USD/JPY will move with them.  However, if they fail to break about near term resistance, support is at 1.385 and the August 17th lows at 1.217.

Source:  Tradingview, Stone X

There are many events this week that could affect USD/JPY, including important monthly economic data, the US debt ceiling debate, the US infrastructure spending bill, an impending US government shutdown and a vote for a new PM in Japan.  Keep an eye on US yields.  Given the current high correlation between USD/JPY and US 10-Year Yields, whichever direction yields move should bring USD/JPY with them!
DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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