USD/JPY Pullback a Buying Opportunity?
After last week's big fall in USD/JPY, we are seeing low volatility and think the USD will now break to the upside. Our view of the fundamentals, sentiment, and key technical levels to watch are outlined below.
USD Fundamentals
You can check a full view of the fundamentals for the USD Click Here to View
In this article, we just want to update the market's view of interest rate cuts that the market expects.
Markets price in a more than 90% probability of a Fed rate cut in September, with about 60 basis points of easing anticipated by year-end. We dont expect this number of cuts but even if they do occur we think these cuts are discounted by the market.
Japanese Yen Fundamentals
“The market maintains the expectation that BoJ rates will be hiked around the turn of the year. To a large degree, that depends on how the Japanese economy fares in a post-Trump tariff world." (RABOBANK)
The market is expecting the Bank of Japan to raise interest rates in the near future, but will they?
We agree with this view on interest rates. "With a year-on-year increase of 3%, nominal wage growth appears robust, but with inflation currently still above 3% (driven by food prices due to supply problems), real wage growth is still negative. In real terms, wages have therefore continued to fall year-on-year and are currently still around 4% below their pre-pandemic level...
"We therefore continue to find it difficult to expect robust domestic demand. This is particularly true in view of the current uncertainty surrounding the impact of US tariffs on the Japanese economy. For the time being, it appears that at least Japanese car manufacturers have responded to the tariffs by lowering their export prices to the US, thereby absorbing the tariffs. This is likely to weigh on the industry's profits and does not bode well for continued robust wage growth...
"All in all, we do not believe this is an environment in which the central bank will raise interest rates anytime soon. The JPY is therefore likely to remain at its current weaker level." (COMMERZBANK)
Minutes from the BOJ’s June meeting showed policymakers remain open to further tightening but a Ministry of Finance official called for policy flexibility, particularly regarding bond purchase operations to ensure market stability. Last week, the central bank held interest rates steady but raised its inflation forecast, while warning of growing downside risks. We don't think they will be in any hurry to raise rates at all if they were, they would be more specific in their messaging.
Sentiment
If we look at the COT Net Traders Positions, we still have a big long speculative long position which, while it has declined from a record net long position, it still remains sizeable historically.
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The market at present is heavily short USDs generally, and the Yen, with its low yield, will be hit hard if the USD does mount a broad-based rally.
Technical Analysis
Our view of the key levels to watch in terms of USD/JPY on the daily chart below.
If you want to view all our research, including our view of 14 setups on a daily basis with our exact entries, stops, and targets: CLICK HERE
