USD/JPY: upside favored by technicals and fundamentals - Scotiabank

The yen is among the worst performers in the FX market, weighed by disappointing domestic data and dovish comments from BoJ board member Funo, said Eric Theoret, Strategist at Scotiabank, while pointing out that yields spreads are wide, lending support to USD/JPY gains.

Key quotes

“JPY is soft, down 0.3% and underperforming all of the G10 currencies on the back of disappointing domestic data and dovish comments from BoJ board member Funo. Industrial production disappointed with a flat print for July, well below expectations of a 0.8% rise. The weaker data were compounded by dovish comments from BoJ board member Funo as he added to expectations for easing at the September meeting. Funo saw no near-term limits to easing, and highlighted the importance of the current policy review in determining the BoJ’s path.”

“Yield spreads are wide, lending support to USD/JPY gains. Measures of sentiment have also shifted considerably, with risk reversals fading the premium for protection against USDJPY downside (JPY strength). Short term risk reversals are even pricing in a modest premium for protection against USD/JPY gains (JPY weakness).”

“USD/JPY short-term technicals: bullish—USD/JPY has cleared the 50 day MA to reach fresh August highs above 103. The MACD and RSI are bullish and DMI’s are providing confirmation to the shift in the balance of risk. The 9 day MA (101.31) has broken above the 21 day MA (101.27) and we look to continued gains in USDJPY toward the July 29 open at 105.27.”