TSX slips after index extends retreat from all-time high
USD/JPY remains tethered to U.S. interest rates, with Fed officials and fresh data setting the tone this week. Japan’s Tokyo CPI may be the one release capable of challenging the U.S. rate outlook.
- Range trade favoured early in the week
- Correlations with U.S. yields still dominant
- Heavy Fed speaker calendar ahead
- Key U.S. data Thursday and Friday
- Tokyo CPI the main Japanese release
USD/JPY Outlook Summary
Range trade in USD/JPY is favoured early in the week in the absence of a black swan event. The key pieces of economic information arrive on Friday, putting increased emphasis on price action and Fedspeak in the days ahead. With the U.S. rate outlook remaining in the driving seat, anything that influences market pricing stands a good chance of moving dollar-yen.
Fed Tether Remains Dominant
Source: TradingView
As has traditionally been the case, USD/JPY has demonstrated a relatively tight relationship with the U.S. interest rate curve over the past fortnight, registering correlation coefficients with Fed rate cut pricing out to June next year, 2-year yields and 10-year yields of -0.75, 0.51 and 0.68 respectively. While not as strong as in periods past, relative to yield differentials, risk appetite and expected U.S. stock market volatility, which have historically been influential given the yen’s role as a funding currency in carry trades, it’s the one factor that has shown some rhyme or reason in recent weeks.
Put simply, when U.S. yields have risen, as was seen last week, USD/JPY has tended to drift towards the upper end of its trading range. That puts increased emphasis on U.S. data and commentary from Fed officials to help guide decision-making in the days ahead.
FedSpeak Hits Overdrive
Source: LSEG (U.S. ET shown)
For traders looking for fresh insights from FOMC members in the wake of last week’s policy meeting, this week should provide plenty with a calendar stacked with Fed speakers, including Chair Jerome Powell, New York Fed President John Williams, and Governors Michelle Bowman and Stephen Miran, the latter now the undisputed dove on the FOMC after calling for a 50-point rate cut next week.
Traders should be on alert for specific preconditions that would need to be met to shift the near-term outlook signalled in the latest Fed dot plot, which pencilled in two further 25-point rate cuts this year. Labour market commentary, in particular, will be very important.
Aside from the overflowing Fedspeak calendar, there is little in the way of new insights from Japanese policymakers other than the release of minutes from a policy meeting held seven weeks ago. Not the most helpful document, considering two BOJ members dissented in favour of a 25-point rate hike at the bank’s meeting last Friday, a rare occurrence of board disharmony under Ueda’s tenure as BOJ governor.
Key Data Arrives Late
Source: LSEG (U.S. ET shown)
Like the central bank calendar, there will be a torrent of new economic data from both the United States and Japan this week for traders to digest, although it’s questionable how much influence they will have over the next few days with the key releases arriving on Thursday and Friday.
In the U.S., the flash PMI reports always receive outsized interest due to the marketing genius of S&P Global in structuring the release to coincide with a part of the month where there’s typically very little new information. That ensures Tuesday’s release will generate plenty of headlines, but whether it has a meaningful impact on USD/JPY is questionable beyond the very short term. Instead, Thursday’s jobless claims update, along with the PCE inflation, incomes and consumption data on Friday, are the reports that carry a far greater probability of sparking volatility in markets.
With a meaningful proportion of Fed officials seemingly dismissing the risk of second-round inflationary effects from tariffs given concerns surrounding the labour market, what matters now for market pricing are indicators on what may alter the outlook for job creation. On that front, the income and consumption data screen as far more important than the core PCE deflator on Friday, the Fed’s preferred underlying inflation measure.
Aside from the data, the U.S. Treasury will also auction 2, 5-year and 7-year notes over the week, providing a test for demand after what’s been a large decline in yields over the past two months.
In Japan, Friday’s Tokyo consumer price inflation report is now arguably the most important piece of information on the Japanese calendar every month, arriving three weeks before the national figure with a decent track record as a lead indicator. As such, it comes across as the one release that has the potential to displace the U.S. rate outlook as a serious source of volatility.
It should also be noted that Japanese markets will be closed Tuesday for a public holiday, likely ensuring a quiet start to the week given the likelihood many Japanese will take the opportunity to indulge in an extended long weekend.
USD/JPY Topside Test Looms?
Source: TradingView
Looking at USD/JPY from a technical perspective, the one thing that stands out immediately beyond the rangy price action seen over the past two months is just how aggressively the pair was bought beneath the intersection of the April uptrend and horizontal support at 145.90 on the day of the Fed meeting last week.
The hammer candle that printed and follow-through buying on Thursday hints that a retest of the upper end of the 145.90-149.00 range may be on the cards at some point this week. RSI (14) and MACD have also shifted slightly bullish, adding to the sense that directional risks may be skewing higher.
The 200DMA and horizontal resistance at 149.00 are the immediate focus. Should we see a further run higher, with a break of the latter opening the door for an extension of the move back towards resistance at 151.00. On the downside, 146.90 is a level to monitor with the price tagging and bouncing from it on more than ten separate occasions prior to last Wednesday’s false break. Beyond the April uptrend and 145.90, 144.40 and 142.42 are the next two support levels of note.