USD/JPY forecast: Steadier JGBs help soothe nerves – for now

 

The USD/JPY bounced back, tracking firmer Japanese bond prices and the Nikkei futures, both managing to bounce back overnight on the back of strong demand for Japanese government bonds. That auction helped to steady the market a day after hawkish comments from the central bank governor had sparked a global sell-off amid fears of yen-funded carry trade unwind. However, the yen could come back into demand, keeping the USD/JPY forecast uncertain and volatile.

 

Yen’s renewed weakness could be temporary

 

Today we saw all major yen pairs rally with AUD/JPY leading the charge as it hit a new high on the week amid a mild risk-on tone across financial markets. But can the yen rebound from here? Sentiment had improved a little overnight (meaning the yen weakened) as investors were reassured by decent demand at an auction of 10-year Japanese government bonds. The calm came a day after the markets had wobbled as Japanese bonds sold off after some decidedly hawkish remarks from BoJ Governor Kazuo Ueda. Markets turned volatile as JGB yields jumped, putting pressure on government finances. With investors pricing in around 20bp hike for the BoJ’s meeting on December 19, this could keep downward pressure on JGBs, keeping yields elevated. If so, any further weakness in US dollar or dovish comments from the Fed officials could easily send the USD/JPY tumbling below 155.00 handle again.

 

Dollar to stay offered

 

The dollar was looking like it wanted to stay bid at the time of writing, but it has come under some pressure in recent days, potentially resuming the decline seen earlier this year. It did recover a little ground yesterday afternoon, likely helped by safe-haven flows moving away from high-beta currencies – which kind of reversed today. Still, a bit more stability in broader risk sentiment is probably needed before the dollar can weaken more substantially against the more risk sensitive currencies. But against the yen, any further volatility in stock or bond markets could see the USD weaken and weigh on the USD/JPY pair.

 

Indeed, US data continues to lean bearish, highlighted by yesterday’s weaker ISM manufacturing print. Even if that release had surprised to the upside, it’s unlikely the market would have meaningfully altered expectations for a December rate cut. Importantly, the key US indicators — such as the jobs report — won’t be released until after next week’s December rate decision. That timing significantly limits this week’s potential to influence rate-cut expectations. As such, I expect the upcoming data to broadly reinforce the market’s dovish view.

 

Technical USD/JPY forecast: Key levels to watch

 

 

The USD/JPY briefly dipped below 155.0 yesterday before the broader dollar rebound kicked in and lifted the pair back to 156.00, where it was trading at the time of writing. Barring a softening in Ueda’s tone — or that of other BoJ officials — I think the ingredients are there for another break lower in the coming days. Still, from a technical standpoint, I would like to see a confirmed break of that key 155.00 handle first. Unless that happens, the broader bullish trend would stay intact. Resistance is seen at around 156.00, 156.50 and then 157.00. Support below 155.00 are not obvious, but was round handles like 154.00, 153.00 etc., should the pair start heading lower.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R