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USD/JPY – Dip Buying Opportunity Coming!
The losses in USD/JPY today tell us that the primary theme of trade was risk aversion. U.S. stocks fell sharply and the deterioration in risk appetite was driven by renewed concerns about the impact of Fed tightening. If the doves (Lockhart and Yellen) are saying that rates could be increased as early as October, then there really could be a strong motivation within the central bank to raise rates in 2015. Their decision to delay this month could be just that – a one to three month wait for more confirmation. The widespread gains in the U.S. dollar confirm that rate hike expectations are a big driver of today’s move in currencies and if the Fed follows through with raising rates we could see a renewed rally in the dollar. In fact we wouldn’t need to wait for the actual rate decision – the greenback could move higher if the chorus of Fed officials coming out to talk about 2015 tightening grows. We have long been bullish dollars and continue to view a dip in the currency as a buying opportunity. Meanwhile the recent strength of the Yen will only make life more difficult in Japan. With the stimulative impact of Abenomics beginning to fade, the recovery is slowing. Tonight’s PMI manufacturing index is expected to show a slowdown in manufacturing activity while Thursday’s consumer price report could show core inflation turning negative for the first time in 2.5 years. Combine that with the recent downgrade by S&P and we see the Yen losing its luster.
Technically USD/JPY is still trading in a tight range with support at 118.25 and resistance at 121.75. However a consolidative triangle pattern is forming in the currency pair, which suggests that a breakout is coming. With no major U.S. data, it is unlikely to happen this week and therefore we view buying USD/JPY towards the bottom of the triangle near 119.25 as an attractive trade for a move back to 121.