USD/JPY maintains bullish uptrend

By Andrew Lee

USD/JPY rose to an 18-year high of 131.34 in early May 2022. In terms of fundamentals, the bullish narrative for the USD/JPY has not changed. I hold the opinion that the future projected rising interest rate hikes of 50 basis points in June and July of this year will at least provide a solid bullish case for the USD/JPY. Some short-term volatility is expected due to profit-taking. The Fed is attempting to calm the markets by controlling the inflation narrative by easing their interest rate hikes at a more palatable pace. I expect the USD/JPY to continue breaking highs and recommend buying at each descending pattern, if any.

Firstly, when we observe other fundamental US economic data, it shows a resilient US economy. Increasingly, large numbers of work vacancies spurred by the 4.4 million number of people who left their jobs in April, the additional 300,000 jobs created in May and the steadily falling unemployment to the 3 per cent region indicate strong wage gains for US workers and therefore, a strong job market in the US. The recent hike in treasury yields above 2.9 per cent is also supportive of a strong USD/JPY.

Secondly, the additional catalyst of the Bank of Japan’s (BoJ) expected accommodative stance as indicated by BoJ board member Seiji Adachi’s reiteration of this, provides a strong basis for the continued devaluation of the JPY. A surge in commodities prices and an emphasis on more competitive exports might cause the BoJ to continue seeing positives in a weaker JPY. With an elevated Consumer Price Index (CPI) breaching the 2 per cent target due to increasing commodities prices spurred by the Ukraine war, there might eventually be a rate hike in the distant future.

Finally, in terms of the technical level, the 130 point might provide a psychological support in the near term. There might be another attempt at a break towards the double top of 131. As at the time of writing (Jun 3, 2022), markets have come down to lows of 129.69 compared to the opening of 129.84. I believe a further breakdown to 128.60 and 127.35 and 126.95 will not happen in the short to medium term, despite the fact that currently, around 30 per cent of retail traders are net short. We also saw stronger gains coupled with daily the Moving Average Convergence Divergence (MACD) turning green, suggesting that the USD/JPY has shifted back to the upside. Moreover, even if these breakdowns happen, stronger buying into these technical levels is expected.

In the near term, we hold the view that the USD/JPY will test the first support level of 131, which is the breakout target for the double top, with a continuation above the trend line. Should this hold a steady view with a net long bullish case for traders, we should expect a further top before testing the resistance of 131.34 and a break should not be surprising over the next 2 months. At the same time, a rebound downwards to the 128.60 level might turn into a sharper correction, ideally not going below the 128 psychological level.

The writer is strategist at Phillip Nova