How to capture the next leg higher in USDJPY

Last week USDJPY locked in an almost 3% gain, closing back above 130 for the first time since early May.

The rebound was supported by the release of resilient U.S economic data (ISM manufacturing and U.S jobs report), strengthening the argument for a 50bp hike at the September FOMC meeting.

As well as further turmoil in energy markets as crude oil closed at its highest level in three months on the expectation of increased demand following the re-opening in China and the start of the driving season in the U.S.

The link between the crude oil price and USDJPY is Japan is a net energy importer. The higher energy prices rise, the more U.S dollars Japan needs to purchase to pay for its energy imports.

The other consideration is higher energy prices flow through into inflation expectations and expectations the Federal Reserve will extend its aggressive rate hiking cycle. Higher U.S yields translate into support for the U.S dollar vs the JPY.

News that South Korea and the U.S fired eight surface to surface missiles on Monday morning off the south coast of Korea in response to missiles fired by North Korea over the weekend provided some temporary safe haven support for the JPY.

However, due to the factors outlined above, USDJPY is expected to soon make its move towards the next upside level, the June 2002 high of 135.16

To position for this, we favour entering USDJPY on a break above resistance at 131.25/35. Specifically, we buy USDJPY on a stop entry and 131.66 leaving room to add on a dip to 130.66. The stop loss would be placed at 129.16, and the target is 135.16.

Source Tradingview. The figures stated are as of 6^th of June 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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