USD/JPY analysis: Japanese yen could further extend rally ahead of key BoJ decision

• USD/JPY analysis: Japanese yen surges as speculation grows over BoJ rate hike
• US dollar off lows on mixed jobs report
• Key data to watch from the US in the week ahead include CPI and retail sales

The Japanese yen has had a strong week, rising more than 2% against the US dollar and making decent gains against other currencies. The USD/JPY bounced off its lows following Friday’s mixed jobs report from the US, while other yen crosses continued to weaken, pointing to underlying bullish momentum in the yen. In the week ahead, the upcoming US CPI report has the potential to move the US dollar, with the USD/JPY bears hoping to see a weaker print. In any event, as we approach the Bank of Japan’s policy decision on March 19, the yen could remain on the front foot and find buyers on the dips, as speculation grows over the potential for it to finally drop its negative interest rates.

USD/JPY analysis: So, why has the Japanese yen surged?

There has been lots of speculation doing the rounds that the Bank of Japan is at long last ready to come out of negative interest rates, possibly as early as later this month. We have heard hawkish remarks from a number of BoJ policymakers, while stronger-than-expected wage growth (+2% y/y) has bolstered bets that the BOJ is about to ditch negative interest rates. Meanwhile, one of Japan’s largest unions secured big pay hikes for some of its members, pointing to higher wages in the coming months. In terms of inflation data, the closely watched Tokyo CPI was above expectations, printing 2.5% y/y. If the BoJ were to start its policy normalisation, you’d feel now would be the perfect opportunity. For it will want to have some ammunition when the economy needs it.

US dollar off lows on mixed jobs report

The US dollar weakened across the board last week, before bouncing off its lows late on Friday when this report was written.  Friday’s jobs report beat on the headline front as jobs rose by 275K, but it disappointed in that the previous month’s data was revised lower, the unemployment unexpectedly rose, and wages grew less than expected.  In the eyes of the market, the Fed is now more likely to cut rates in June, than was the case before. That’s why gold has rallied to a new record high. By Friday, benchmark 10-year Treasury yields had slid to a one-month low, and the dollar index was down for the sixth straight day, albeit off its earlier lows.

But the trend of US data surprises has started to turn weaker. Friday’s mixed-bag jobs report add to a growing list of US macro data which have disappointed expectations in the last couple of weeks. Among others, they have included the ISM services and manufacturing PMIs, factory orders, ADP private payrolls, UoM and CB consumer sentiment surveys, new and pending home sales, Chicago PMI, Richmond Fed Index, Durable Goods Orders and GDP.

USD/JPY analysis: What does it all mean for the yen?

With US bond yields falling and Japanese yields rising, the yield differentials with Japan continues to compress. If sustained in the week ahead, then this should help to further fuel the yen rally, putting downward pressure on the USD/JPY and other yen crosses.

Source: TradingView.com

As a result, the USD/JPY could break below key support around 146.00-146.50 area, where the February low and the 200-day average converge. If so, the USD/JPY bears could target the 61.8% Fibonacci retracement level at 144.30 next.

Meanwhile resistance is seen around 147.62 on the daily time frame, a level which had provided support until Friday’s break down. A potential retest of this level could ignite fresh selling, while a clean break back above it could send the USD/JPY back towards the 149.00 area.

Key data to watch from the US in the week ahead

US CPI

Tuesday, March 12

12:30 GMT

The US dollar will be in focus again with key inflation data to come in the week, with CPI due on Tuesday and PPI on Thursday. Last time, CPI came in higher, printing +3.1% year-over-year in January vs. +2.9% eyed, albeit it slowed down from +3.4% the month before. Core CPI was also hotter. Yet, the dollar’s gains following the hotter-than-expected inflation data was minimal, suggesting investors are expecting CPI to weaken more profoundly moving forward. Will we see a surprisingly weak print this time? If so, this should be further bad news for the USD/JPY pair.

US Retail Sales

Thursday, March 14

12:30 GMT

Both headline and core retail sales data disappointed expectations last time, and this contributed to the weakness we have seen in the dollar of late, with a few other macro pointers also pointing to a slowdown in economic activity. If further evidence emerged of a struggling consumer, then we could see the dollar weaken and stocks may also suffer after making solid gains in the initial months of the year. A very strong report is what the dollar bulls will be eying.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

How to trade with City Index

You can trade with City Index by following these four easy steps:

1. Open an account, or log in if you’re already a customer 
   
   • Open an account in the UK
   • Open an account in Australia
   • Open an account in Singapore
   
   
2. Search for the company you want to trade in our award-winning platform 
3. Choose your position and size, and your stop and limit levels 
4. Place the trade