Enclosed our view on USD/JPY after a major move to the downside, we think a major move to the upside is unfolding. Our view of the fundamentals, sentiment, and technicals below.
JPY Fundamentals
The upcoming upper house vote is introducing a political risk premium into the yen, with parties pledging tax cuts and fiscal giveaways in a bid to shore up voter support. Recent polls indicate that Japan’s ruling coalition – the ruling coalition of the Liberal Democratic Party (LDP) and Komeito – might lose its majority in the Upper House election scheduled for July 20. This will raise both fiscal and political risks in Japan and complicate trade negotiations amid the looming US tariffs on Japanese exports.
"The move higher in USD/JPY also reflects yen weakness ahead of this weekend’s Upper House election. The risk of the government losing its majority was highlighted by a poll in the Asahi Shimbun published today," (Lee Hardman, FX analyst at MUFG Bank Ltd.)
Ratings agency Moody's has already warned of the threats to Japan's credit rating. Debt to GDP is huge in Japan, and Government bond yields have spiked. Yesterday, the 10-year yield hit its highest intraday level since 2008, while both the 20-year and 30-year yields reached there highest intraday level since they were first issued in 1999, as investors become nervous about Japan's fiscal position.
Japan's debt to GDP ratio is huge as we can see on the chart below.
In response bond yields are soaring.
In addition, US President Donald Trump last week issued notices to key trading partners, including Japan, outlining individual tariff rates starting August 1. Japan faces a punishing 25% tariff on all exports to America amid stalled US-Japan trade negotiations, particularly over Japan’s protection of its rice market. This comes at a time when economic growth in Japan has been slowing. Adding to this, declining real wages and signs of cooling inflationary pressures, which will further complicate the Bank of Japan's monetary policy in terms of raising interest rates.
USD Fundamentals
The USD has seen a broad based sell off against all major pairs in recent months but the USD but it has a good yield in terms of interest rates and recently the market has pared back cuts which is bullish the USD and recent economic data has been good – the market was looking for aggressive interest rate cuts and the possibility of a recession and built up a large speculative short position which is now being taken out of the market
Speculative Positioning
In terms of speculative positioning, speculators took a record long recently on the COT Net Traders Positions and these speculators are now getting hit on stop. The chart below, shows speculative positioning in relation to price action in USD/JPY.
The chart below shows speculative positioning v commercial hedgers, big divergences in this pair normally break in favor of the commercials. If you want more info on how to use COT Data and see ALL our Analysis, Click Here
Technical Analysis
USD/JPY analysis below If You want to see all our research and analysis of 14 pairs on a daily basis click here
