USDJPY primed for a breakout?
The USDJPY continues to correlate closely with movements in the US 10-year yield. After the Hawkish shift in guidance from the Fed last week, the policy normalization fuse has been lit. 10-year yields first reacted by rocketing higher, but then slumped. Some of the reasons swirling around markets for this price action are as follows 1) Inflation will now be contained 2) A risk-off bid 3) Positioning adjustments. I still feel 10-year yields will drift higher from here and this should provide a tailwind to USDJPY. One potential impediment to serious gains like we saw earlier in the year is positioning. Net Specs are quite short currently and there was a large trimming of these shorts over last week. The carry trade will certainly come back in vogue as interest rate differentials continue to widen with divergent central bank policy and the yen will be the more preferred funding vehicle as opposed to the dollar after the Fed’s more hawkish tilt.
I like the chart setup for USDJPY. Its made a flat sided ascending triangle pattern, which is typically bullish. Price is also in a nice little ascending channel as USDJPY grinds higher. The momentum indicator, the RSI is confirming price moves as both make higher highs and lows. The RSI also has space to move higher before it can be considered overbought. The 21-day EMA has crossed above the 50-day SMA and is now underpinning price as a form of dynamic support as well as the uptrend line for any pullbacks. The 111 is quite sticky resistance and will need a strong push higher in US yields to breach this zone. Above that 111.2 and 111.5 could be good initial targets with higher moves reaching 112 potentially. Dips could be bought on pullbacks, an area to monitor would be around the 21-day EMA and uptrend line which are also around the round number of 110.