USD/JPY bulls eye fresh highs: Asian Open – 22nd August 2023

Market Summary:

Bond yields continue to grab headlines with real yields pointing higher. A growing expectation of higher-for-longer Fed rates, a resilient US economy and increased treasury debt sales are key drivers for real yields, and one which

The US 2-year yield closed above 5% for the first time since March on Monday. But if history is anything to go by (and this time is no different) then perhaps we should be on guard for yields to drop. Jerome Powell’s speech on Friday could well dictate which side of 5% the 2-year yield – which is more sensitive to Fed policy – closes on. With that said, it’s unlikely Powell will strike any such dovish tone required to make yields drop meaningfully given the resilience of the US economy. So perhaps it is different this time…

• The PBOC (People’s Bank of China) surprised most by holding their 5-year loan prime rate (PR) steady, although they did cut the 1-year by 15bp.
• A faltering property market has a -15bp cut for the 5-year LPR as it is the benchmark rate for mortgages in China.
• The PBOC’s inaction weighed in China’s stock market indices, sending the China A50 back to key support at 12,400 and the CSI 300 fell to its lowest level since November, suggesting no immediate appetite to call the plunge protection team (where State banks are ordered to support the market)
• Wall Street indices rose for a second day as they shook off last week’s negative sentiment, with the Nasdaq 100 leading gains ahead of a key earnings report from Nvidia (NVDA) on Wednesday
• View my weekly COT report where we take a look at positioning of asset managers on the Nasdaq 100

Events in focus (AEDT):

• 15:00 – Japan’s BOJ core CPI
• 21:30 – FOMC member Barkin speaks

ASX 200 at a glance:

• The ASX 200 aw its lowest daily close since 11^th July on Monday, although prices held above last week’s low and 7100.
• 9 of its 11 sectors were also lower, led by consumer staples and info tech
• Implied volatility continues to rise and rose to its highest level in a month
• 7100 remains a key level of support for bulls to defend, although the positive lead from Wall Street and SPI futures rising 0.24% overnight suggests potential support for the ASX 200 cash market today

USD/JPY technical analysis daily chart):

We could be fast approaching popcorn time on USD/JPY again. Rising yields (and widening differentials) helped USD/JPY form a bullish engulfing day on Monday, stopping just beneath last week's high and the US 'soft CPI' high set on November 10th.

Japan’s Ministry of Finance (MOF) sent a verbal warning shot last week, so I expect nothing less (and likely more) if this continues higher. My guess is an increased level of verbal intervention up to 150, with increased odds of actual intervention from the Bank of Japan (BOJ) around or above 150.

USD/JPY technical analysis (1-hour chart)

Price action from last week’s high to low appears to have been corrective, with a false break of the October low and June high occurring ahead of a strong break of trend resistance. Prices are now consolidating within a potential continuation pattern on the 4-hour chart, although it wouldn’t surprise me too much to see a spike or two lower around the Tokyo open at 10:00 AEDT. Either way, the potential path of least resistance appears to be higher unless we get some further verbal warning shots from the MOF or BOJ. 14.59 is the initial target, the daily R1 pivot sits at 146.70 and the upper 1-day implied volatility band at 179.09.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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