We’re nearing a unique day for markets tomorrow as the Non-farm Payrolls report is set to be released on a holiday when many major exchanges are closed. This in and of itself can lead to volatile conditions as thin liquidity meets motivation from the headlines, but we also have the brewing conflict in the Middle East to consider as that adds another very unpredictable layer to the drama.
For this to come to fruition, it seems that we’ll need to avoid an unwind scenario in USD/JPY, which would require the Bank of Japan to take a step back from defending the 160.00 level. But, if they did want to make a mark and if NFP comes out on the hot side tomorrow, it would be prime opportunity to maximize impact as an intervention during holiday thin liquidity conditions could create considerable volatility.
US Dollar Daily Chart
Chart prepared by James Stanley; data derived from Tradingview
USD/JPY
I still consider this as the eye of the storm for the US Dollar and the scenario in late-January illustrates why, as a fast case of USD/JPY weakness drove the USD deep into oversold territory on the daily and even EUR/USD was rallying up to fresh highs while going deep into overbought status.
The 160.00 level has long been thought as the spot that the BoJ was going to defend at order of the Finance Ministry. The selling in the pair hit pretty quickly after the weekly open and there was a concerted one-sided move, although that only ran to around the 158.50 level and such a minor relative pullback isn’t the usual fingerprint of an intervention effort.
But given the NFP report tomorrow, where strong jobs data could push out US rate cut odds and increase the possibility of a rate hike, there could be an open door for bulls to make a move and test the resolve of the BoJ, very similar to what showed in late-2022.
For the USD breakout to take hold, it would seem that we would need the BoJ to take a step back from 160.00 defense and, instead, cast that line in the sand around the 165.00 level.
But this makes for a pensive backdrop as we go into tomorrow’s NFP report when many exchange based markets will be closed for the holiday.
USD/JPY Daily Chart
Chart prepared by James Stanley; data derived from Tradingview
EUR/USD
For USD-weakness I still like EUR/USD a bit more. This week we saw a fresh high print in DXY but, notably, EUR/USD diverged and set a higher-low. This isn’t quite something that can be spelled as bullish longer-term, as there’s been continued hold of resistance in the 1.1600 neighborhood. But the fact that USD bulls were unable to press a fresh lower-low in EUR/USD is an early sign that there could be brewing reversal potential, especially if the ascending triangle formation in DXY is to fail.
EUR/USD Four-Hour chart
Chart prepared by James Stanley; data derived from Tradingview
USD/CAD
For USD-strength, USD/CAD is still my pick, although the past couple of weeks have shown a strong bullish breakout and the pair is now stalling ahead of the 1.4000 level. But what is attractive here in my opinion is pullback potential and higher-lows at either 1.3800 or the familiar 1.3727 level that was support last year before becoming resistance ahead of the most recent breakout.
USD/CAD Daily Chart
Chart prepared by James Stanley; data derived from Tradingview
--- written by James Stanley, Senior Market Analyst, Global Macro
