Currency Analyst since 2010

USD/JPY: can the break up be sustained?

 Mark Jensen

On Tuesday USD/JPY has finally closed above the daily Ichimoku Cloud and the triangle resistance. This allows us to expect that the greenback will resume its move towards 124 and higher.

For now US dollar is finally approaching the 120 yen handle. The market’s now driven more by the expectations of the Fed’s rate hike than by the demand for safe haven yen. Good jobs figures for January have managed to erase much of the earlier concerns about the American economic recovery.

Still, there are many risks which can make the US yield advantage over Japan lower. Risk aversion may strengthen because of Greece and Ukraine. In addition, bets on the Federal Reserve’s tightening will likely remain very unstable. After all, other central banks are moving in the opposite direction, so more and more traders start realizing that the US along won’t be able to drive global economic growth. This is why I feel that we need a further USD-positive catalyst to make USD fly above 120 yen – something that will make traders sure than the Fed will tighten and the Bank of Japan will ease.

BofA Merrill Lynch expects USD/JPY to rise towards 125 by June, and I agree to that. There are reasons to believe that selling pressure on yen will intensify by April as Japan starts new financial year on April 1 (yes, things are different in Japan).

I do favor the medium term longs, so it might be a good thing to go long opening small bullish positions on the pullbacks down and then scale in increasing position size, because in the near term there are many risks to take into consideration.

Support is at 119.20 and 118.70. Resistance is at 120.25 and 120.75 ahead of 121.80. The pair is likely to spend more time in the 118.00/120.00 area before a break higher. Above 119.20 the outlook is bullish.

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