Yield Differentials remain a driver for USDJPY

USDJPY, H4 and Daily

The Dollar and Yen have traded firmer against most other currencies as the risk-on sentiment that powered the USA500 and Nasdaq to new record highs waned in Asia. More precisely, the Yen as during the Tokyo session today posted gains against the Euro and Australian Dollar, and most other currencies, as Chinese stock markets come under pressure and Asian equities more generally struggled. Investors are concerned that the US will next month act on its threat to implement tariffs on a further $200 bln worth of Chinese imports.

Meanwhile, USDJPY has held in a narrow range below the 4-week high at 111.82 that was printed yesterday. The high was driven by the S&P 500 and Nasdaq’s performance amid hopes that the US and Canada would agree new trading terms by Friday to form a revamped (and possibly renamed NAFTA agreement). Yield differentials remains a fundamental bullish driver for USDJPY, but the risks being posed by US-driven trade protectionism has been capping upside potential in recent months, which expected to remain the case.

From the technical perspective, Yen remains one of the major currencies that are still trading in positive territory versus the Dollar year-to-date; USDJPY is down by 1% so far in 2018, despite its outperformance, major Yen-positive drivers at the start of the year have run out of steam since Q2.

The monthly picture is neutral so far, while weekly and daily timeframes remain to the bullish outlook since April, as the pair is forming higher lows. In the Daily chart, after the rebound seen from month’s low, the pair is well above the 61.8% Fib. level from the peak of the year, while it is currently retesting the upper Bollinger Bands line, moving above all 3 MAs.  According to the momentum indicators, the asset holds its positive momentum in the daily-term as the RSI is positively sloped above neutral zone and MACD is turning to the positive area.

On the upside, Resistance comes at month’s peak, at 112.14, and Support at 110.80 (61.8% Fib. level from the peak of the year). Further gains above 112.14 would imply that the path is now open for the 113.00 round key level and the 113.16 top achieved on July 19.

Intraday, we are facing a more of a bearish momentum since yesterday’s peak, in contrast with momentum indicators. RSI maintains a nearly flat line close to 70 barrier, whilst MACD increases within the positive area above its signal line. Hence intraday a break of the 111.50 level ( 2 latest up fractals) could suggest the retest of he confluence of 20- and 200- period SMA in the 4-hour chart, at 111.27. Resistance comes at 111.82.However any move to the downside remains a correction move for the sharp rally seen in August.