USD/JPY Headed Back Up to 121

USD/JPY Headed Back Up to 121

For the past few weeks USD/JPY has struggled to break its 1 month high despite Janet Yellen’s clear case for raising interest rates this year. This move should not surprise our members as we have been looking for a pullback in the dollar pre-NFP. Aside from profit taking, the decline in the dollar today was driven by a sell-off in stocks, decline in Treasury yields and mixed U.S. economic reports. However we believe that none of these reasons including data is damaging enough to halt the uptrend in the greenback. We heard from 3 FOMC members today -- Tarullo, Dudley and Evans. Tarullo did not touch on monetary policy, but Dudley and Evans both believe that we are close to the first increase. Dudley prefers 2015, Evans 2016 but if the Fed raises rates in 2016, Evans see 3 hikes in one year. This shows that even the doves are leaning towards a rate hike. There are enough Federal Reserve officials talking about 2015 liftoff that the losses in the dollar will be limited but there’s also enough uncertainty surrounding Friday’s non-farm payrolls report that we could see profit taking in the dollar if it rises to the upper end of the range before the release. Ultimately forecasts are high for this month’s payrolls report and more importantly, the trajectory for Fed tightening is clear and therefore buying dollars remains our favorite trade.

Technically, the triangle is still in place for USD/JPY. A close above 121 would be needed to open the upside for a move above 122. A close below 118.25 however would expose the currency pair for a dip to 116.

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