USD/JPY technicals remain bullish - Scotiabank

Eric Theoret, Strategist at Scotiabank notes that USD/JPY technicals remain bullish, while the broader tone of risk appetite and the improvement in prospects for global growth are set to deliver JPY weakness.

Key Quotes

“JPY is weak, underperforming with a 1.2% decline from Wednesday’s close and trading at levels last seen ahead of the BoJ disappointment from late July. The broader tone of risk appetite and the improvement in prospects for global growth are set to deliver JPY weakness via widened interest rate differentials on the back of a shifting outlook for relative central bank policy. The 2Y U.S.-Japan spread is widening in a JPY-negative manner, moving toward 120bpts at levels last seen in late 2008.”

“Risk reversals are also showing a rapid moderation in the premium for protection against JPY weakness and measures of implied JPY appear to be firming. JPY is vulnerable as we consider measures of sentiment and relatively elevated bullish CFTC positioning.”

“USDJPY short-term technicals: bullish—USDJPY has broken both the 38.2% Fibo of the 2011-2015 rally (106.57) and the 200 day MA (106.61). Momentum signals are bullish, short-term MA’s are aligned in a bullish manner, and the 50 day MA is climbing above the 100 day MA. A consideration of the June 2016-August 2016 decline in USDJPY (on a closing basis) shows a 38.2% Fibo retracement at 109.72. We look to USDJPY gains. Near-term support is expected at 105.”