In the past month, the dollar has found support against the Yen, at around the 140 level, for the third time in 18 months (see FIG 1 below). Technicians, as a rule of thumb, suggest that once a level has been tested and held three times, it becomes strong support*.
In addition to that, positioning in USDJPY is at its most bearish (net SHORT) on record (FIG 2). There’s therefore fuel for further upside in USDJPY in coming weeks. Other medium term models carry a similar message. Technically, for example, USDJPY is rallying from oversold levels, while sentiment has recently reached multi-year bearish levels (a contrarian BUY signal).
The key question, though, is: What will drive the direction of USDJPY beyond that timeframe? And, in that context, how should we think about the rapid back up in JGB yields (i.e. which are up sharply to multi-decade highs in recent months, FIG 3)? Does it matter, given how much the BoJ already owns? Having said that, high inflation and QT** are, no doubt, part of the reason yields are rising. How much momentum does that pick-up in inflation have? Will higher yields eventually lead to a financing challenge for the Japanese government? We’ll be addressing these questions (and other related Japanese ones) in our forthcoming ‘Global Macro’ publication. See HERE to sign up for that publication.
Fig 1: USD-JPY spot rate shown with 50-, 90-, & 200-day moving averages
*NB technicians may also point to the ‘reverse head & shoulders’ pattern that’s arguably formed in the last 18 months (a technically bullish signal). That is a technical pattern characterised by three distinct troughs in an asset price (a lower “head” between two higher “shoulders”). This has formed in USDJPY in the last 18 months (albeit only just – see FIG 1 above). Technically it signals a potential shift from a bearish to a bullish trend.
**NB The BoJ decided last year to shrink its balance sheet (QT) by slowing its purchases of JGBs (see FIG 4).
Fig 2: USDJPY vs. net speculative futures positioning in USDJPY
Fig 3: Japanese 10, 20, & 40 year JGB yields (%)
Fig 4: Japan Central Bank Outright Purchases of JGBs (JPY, trillion)
