Stealth intervention causes wild swings in USD/JPY; focus stays on Middle East and next US CPI
USD:
The US dollar weakened across the board yesterday following interventions
from both Japan and South Korea. Throw into the mix month-end flows and you get
noisy and volatile price action. The moves had nothing to do with the Fed or
economic data.
Looking ahead, the focus will remain on the US-Iran developments and on the
next US CPI report, as that could decide whether the Fed hikes in September or
not.
The situation in the Middle East has barely changed, although Trump’s
rhetoric seems to have softened a bit. Nevertheless, until we get a clear
de-escalation, inflation risks will remain skewed to the upside.
JPY:
On the JPY side, the currency
appreciated massively yesterday following a stealth intervention. The moves
were also likely exacerbated by a rare South Korea dollar-selling intervention.
Throw into the mix month-end flows and you get a very noisy and volatile price
action.
Almost half of the gains
were already erased as USD/JPY buyers thanked the Japanese officials for giving
them much better prices. Without a change in the fundamentals, the
interventions will continue to be just clearing events to rebuild positions at better
levels. The trend is unlikely to change without a dovish repricing in Fed
interest rate expectations or a faster BoJ tightening pace.
On the monetary policy
side, the BoJ held interest rates unchanged today as widely expected with Takata
(who’s the most hawkish member) dissenting in favour of a rate hike. The
statement was largely unchanged with no hawkish signals. The near-term
inflation forecast was revised downward, which doesn’t point to a heightened pace
for rate increases.
BoJ Governor Ueda didn’t offer
any clear policy signal, but he mentioned that they could speed up the pace of rate
hikes if financial conditions become too easy. That’s certainly not a problem
at the moment as bond yields continue to hover around cycle highs, while the
Nikkei is down 13% from all-time highs. The market pricing remained largely
unchanged with 67% chance of a hike in October.
USDJPY TECHNICAL
ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can
see that USDJPYdropped all the way back to
the major upward trendline around the 158.50 level after Japan’s intervention.
The buyers didn’t think twice and leant on the trendline with a defined risk
below it to position for a rally into new cycle highs with a much better risk
to reward setup. The sellers will need a break below the trendline to open the
door for new lows, with the 155.00 handle as the first target.
USDJPY TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, the
price is trading right around the major 160.50 resistance zone. This is where
we can expect the sellers to step in with a defined risk above the resistance
to position for a drop back into the trendline. The buyers, on the other hand,
will want to see the price breaking higher to increase the bullish bets into
new cycle highs.
USDJPY TECHNICAL
ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, there’s
not much we can add here as the buyers will look for a break to extend the
rally into new highs, while the sellers will continue to pile in around the
resistance to target the trendline and a potential breakout. The red lines
define the average daily range for today.
UPCOMING CATALYSTS
Today, we conclude the
week with the US Q2 Employment Cost Index. Traders will also keep monitoring
US-Iran developments.
This article was written by Giuseppe Dellamotta at investinglive.com.