Key Level Break in USDJPY

The break of the 107.29 level in USDJPY is a significant technical development which leaves the USDJPY poised for further losses over coming months. USDJPY had been trading a broad 107s to 114s range over the last year, with several tests either side of the range. This break, however, marks the first set of consecutive closes beyond the range border. With the range having broken, traders are now keen to see how the BOJ responds to this latest bout of Yen appreciation.

PM Abe’s submission for BOJ chief Kuroda to be reinstated looks likely to succeed and the continuation of existing BOJ policies should be a positive for USDJPY. However, while these current policies have failed to provide any great JPY sell-off over the last year it isn’t clear that Kuroda’s reappointment alone will be enough to push USDJPY back up above the 107 level watermark.

Fed Tighetning Cycle Not Supporting USDJPY

The other issue affecting USDJPY is the story surrounding the Fed tightening cycle. The Fed’s recent rate hikes have done little to ignite any rally in USDJPY and what should be of concern to bulls is the breakdown in correlation between USDJPY and US rates which previously had been linked strongly and saw speculative buyers buying USDJPY on rise in US rates.

The nature of the USDJPY market is important and the break below 107 could make it complicated for Japanese exporters who had hedged their 110 purchases with sell orders at this level. If exporters revise their USDJPY assumptions lower for fiscal year18/19 lower, this could prompt further USDJPY selling.

USDJPY Market Dynamics

Institutions have noted that Japanese lifers were buying dips between 100 to 107 and pension funds are likely to continue buying dips cautiously as the market moves below this range. The difference here is that the move below 107 means these funds will need to be careful about in boosting their riskier investments ahead of the fiscal year-end.