The US dollar resumed its upward march, benefiting from interest rate differentials and safe haven flows. Bond market players have started to push US yields higher again, bolstering the US dollar's interest rate advantage, while some disappointing trade surveys from China pushed investors to the safety of the global reserve currency. Accordingly, the price of the USD/JPY currency pair has moved towards stronger upward levels, testing the 147.80 resistance level. This is the highest ten-month resistance level for the currency pair, and settled around the 147.45 level at the time of writing the analysis.
The main victim when US bond yields rise is the low-yielding Japanese yen. The Japanese yen has been hit hard by the rise in foreign earnings and the sharp rise in oil prices, as Japan imports almost all of its energy needs from abroad, and the yen is hit from the trade channel every time global energy prices rise.
Although USD/JPY is trading near the levels that Tokyo decided to defend last year, the risk of another round of intervention in the forex market appears fairly low as the pace of the yen's depreciation has been much slower this time and officials have not been equally vocal. Accordingly, the Japanese authorities are likely to step up their verbal warnings to ward off speculators if USD/JPY continues to rise towards the 150.00 resistance but are unlikely to actually pull the trigger for intervention, a view supported by the muted implied volatility in FX options.
This generally indicates that institutional players are not panicking to hedge against any big moves in the Japanese yen.
In China, it turned out that the wave of optimism that prevailed in recent days did not last long. The reality check came in the form of a disappointing survey of the Purchasing Managers' Index for services, which fell sharply in August, foreshadowing the continued slowdown in economic activity. China-linked assets fell behind closed doors in the aftermath. The Australian and New Zealand dollars collapsed, with the latter reaching new lows for the year as these economies rely on Chinese demand to absorb their commodity exports. Similarly, Asian stocks fell along with energy prices, although these moves were not as severe.
One encouraging development was that Chinese developer Country Garden avoided default after paying interest on $2 bonds, helping to avert a deeper crisis in the country's struggling real estate market, at least for now. However, this was overshadowed by weak PMI readings.
Expectations of the US dollar against the Japanese yen:
- The general trend of the USD/JPY upward currency pair is getting stronger.
- Its recent gains have moved the technical indicators towards strong buy saturation levels.
- I still prefer to think about selling the currency pair instead of risking and buying from its sharp peak.
- The closest resistance level for the currency pair is currently 148.30 and then the next psychological peak 150.00.
The difference between the policy of the strict American Federal Reserve Bank and the Bank of Japan, which adopts an easing policy contrary to all the policies of the international central banks, is still an important factor for the continuation of the bulls' control in the direction.
It must be taken into account that a Japanese intervention in the markets may bring strong and sharp sales to the currency pair and the movement below the psychological level of 140.00 will be entered as a first stage.
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