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Oct 12 - 01:55 PM

USD/JPY - COMMENT-Fed-Driven USD/JPY Eyes 2018 High After Breaking Summer-Lull Bonds

By Randolph Donney  —  Oct 12 - 11:55 AM

USD/JPY is trading at its highest level in nearly three years after soaring beyond its 2021 and 2020 highs in recent sessions on Fed tightening expectations, with a clear objective now at 2018's peak 114.55, resistance which is reinforced by a key Fibonacci retracement level.

After a summer of excruciatingly narrow weekly ranges -- the tightest since 2014 -- the market was caught unprepared for USD/JPY's surge of more than 4% since the Fed's Sept.
22 meeting day low at 109.12.

On Tuesday, USD/JPY was approaching 114 and a nearby 161.8% Fibo objective off August's 108.725-110.80 base on EBS, but the bigger targets are 2018's high and the 76.4% Fibo of the 2016-20 downtrend at 114.54-55.

The main macro motivation for USD/JPY's rapid advance is surging Treasury-JGB yields spreads, with the 5-year differential at incipient pandemic levels.

The break above the last two years' highs was helped by the long-term bottom that USD/JPY established well before the pandemic forced the Fed to slash rates from 1.75% to 0.25% in March 2020, while the BOJ's policy rate remained at -0.1%.

With the Fed now about to begin tapering, Japan is more vulnerable than the U.S. to recent energy shortages and supply chain problems in Asia.

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Source:
Refinitiv IFR Research/Market Commentary

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