USD/JPY analysis: Will MoF/BoJ intervene again as focus turns to US CPI?

The USD/JPY was the outlier in an otherwise bearish week for US dollar against most currencies of major economies. In truth, it wasn’t a big week for data or volatility, which is very typical for this time of the year. We had seen the likes of the EUR/USD and AUD/USD find good support on Thursday following the release of weaker-than-expected jobless claims data, a week after we had disappointing non-farm payrolls and ISM PMI data. Yet, the Japanese yen didn’t find the same level of love, thanks largely to concerns about sticky nature of inflation in the US keeping monetary policy tight for longer compared to economies like Japan where monetary policy is among the loosest in the world. Inflation concerns came back to the forefront on Friday, after a closely-watched University of Michigan survey revealed a jump in inflation expectations, even as consumer sentiment dropped sharply. Investors will be looking forward to the release of Consumer Price Index (CPI) on Wednesday, which is going to be the next big catalyst for the dollar and markets in general. The USD/JPY analysis could change dramatically should Japan intervene again.

USD/JPY analysis: Will the BoJ intervene again?

There were no signs of further intervention last week, which explains why the USD JPY was able to climb back. The week before, the Japanese government and the Bank of Japan apparently conducted two rounds of interventions to support the yen, on April 29 and May 2. According to Nikkei, this totalled to around 8 trillion yen. Attention will remain on the Ministry of Finance and the BOJ in the week ahead as rates have climbed back to near 156.00 level again. As these events are impossible to time, traders will need to exercise extreme caution when trading the yen, especially on the short-side. Appropriate risk management strategies should be taken without fail. If we don’t see another round of intervention, I wouldn’t rule out the possibility for the USD/JPY to climb back to 160.00 in the coming days, given the big divergence in monetary policies between the US and Japan. However, that is assuming we won’t see a significant deterioration in upcoming US data. Speaking of which…

All eyes on CPI as focus turns to big week for US data

Among the key US data highlights in the week ahead, we will have PPI data on Tuesday, followed by CPI, Retail Sales and Empire State Manufacturing Index all on Wednesday. Thursday will see the release of Housing Starts & Permits, as well the Philly Fed index, industrial production and weekly jobless claims. From Japan, quarterly GDP data is due out on Thursday.

For US dollar traders, the focus is on signs of weakening economy and labour market versus continued inflationary pressures. This week’s key inflation data will provide us with big clues in terms of the duration of high interest rates.

Following another sharp rise in the UoM’s Inflation Expectations survey to 3.5% vs. 3.2% last month, the latest PPI and CPI data for April have the potential to intensify or reduce inflation concerns significantly depending on the direction of the surprise. CPI has consistently beaten expectations since the turn of the year. The Fed and dollar bears will be hoping to see a softer print for a change, else rate cut expectations could be pushed out further. CPI is seen easing to 3.4% y/y in April vs. 3.5% the month before. On a month-over-month basis, a 0.4% rise is expected on the headline CPI and 0.3% increase in core CPI.

USD/JPY analysis: Technical levels to watch

Source: TradingView.com

The USD/JPY remains in a bullish trend for now as objectively indicated by rising 21-day exponential and 200-day simple moving averages. Rates bounced back sharply last week after dipping back to that big 152.00 support level the week before, on the back of suspected intervention from Japan. The 400-pip bounce has taken the UJ back near 156.00 resistance level. A potential break above here could pave the way for 158.00 and possibly another test of the 160.00 hurdle.

On the downside, potential support comes in around 155.00 initially, ahead of 153.60 thereafter. The big support zone is that 152.00 level, where the USD/JPY had formed a double top previously.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R