After falling sharply yesterday following the news of an impeachment enquiry into U.S. President Donald Trump, USDJPY rebounded overnight in impressive fashion. In this note, we examine the catalysts for the overnight recovery and assess whether the rally in USDJPY can continue.
Boosting USDJPY was positive news on the trade front from two different sources. A bullish suggestion from President Trump that a deal with China may be reached sooner than expected coincided with news that China had agreed to make additional purchases of soybeans and pork. Elsewhere, it was confirmed that the U.S. and Japan had reached a limited trade agreement to cut tariffs on U.S. farm products including beef, pork and cheese.
Higher interest rates also proved supportive for USDJPY following comments from Chicago Fed President Evans. Evans who has earnt a reputation for being a reliable dove, told reporters that he thought after two recent rate cuts inflation would overshoot and the reason why he omitted including further cuts in his 2019 forecast.
In response, the yield on U.S. 10-year notes closed the session near 1.73%, 8bp higher than where they started the day. As outlined in this article recently, https://www.cityindex.com.au/market-analysis/usdjpy-recovery-continues/ there is a positive correlation between USDJPY and U.S. interest rates, i.e. when U.S. interests rates rise it is a positive for USDJPY and vice versa.
Also, from the article above, we suggested buying USDJPY on a corrective pullback to 107.50/30 with a sell stop placed below 106.30. While USDJPY did overshoot the buy zone mentioned above, the overnight rebound goes some way to suggesting a corrective Wave iv low is in place at yesterday’s 106.96 low.
Should USDJPY now break and close above the resistance provided by the 200-day moving average 107.85/90 area, it would suggest that Wave v higher has commenced, targeting a move towards 109.30/50.
In short, we continue to like USDJPY higher. However, to protect against ongoing volatility, we advise raising the stop loss on long USDJPY positions from 106.30 to 106.90.
Source Tradingview. The figures stated are as of the 26th of September 2019. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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