USD/JPY showed a strong breakout last week in the aftermath of the Fed, BoJ and the Core PCE report.
The big fundamental drive there was lower odds of rate cuts starting from the Fed - and this pushed back the worry of a larger case of carry unwind as USD/JPY remains more than 40% above the early-2021 levels that showed before the carry trade episode got started.
But - chasing the pair continues to be a major challenge as I've highlighted in these pieces, and the Fibonacci resistance that showed up on Thursday has since led to a strong pullback, with USD/JPY now testing another key Fibonacci level for support at 146.95, which is the 61.8% retracement of the recovery move that started last September.
The risk here is that markets pricing in rate cuts from the Fed could cause a rally in the Japanese Yen which brings USD/JPY back to that 140.00 level. And if that breaks, there could be even more motivation for hedges built around that carry trade to unwind. Similar to last July, that could eventually hit other asset classes as the leverage brought on by low rates in Japan quickly draws out of the market. So, there's some significant macro risk here, and this is one of the reasons why we saw such a strong breakout last week when it looked like that rate compression between the U.S. and Japan was not going to happen.
The big question now in USD/JPY is whether bulls step in to hold support. Two weeks ago, following Japanese elections, it was the 145.92 level that held support, and that remains a big line in the sand today. But, if we see sellers grind below 145.00, that could cause other current longs in USD/JPY to get cautious. - js
The big fundamental drive there was lower odds of rate cuts starting from the Fed - and this pushed back the worry of a larger case of carry unwind as USD/JPY remains more than 40% above the early-2021 levels that showed before the carry trade episode got started.
But - chasing the pair continues to be a major challenge as I've highlighted in these pieces, and the Fibonacci resistance that showed up on Thursday has since led to a strong pullback, with USD/JPY now testing another key Fibonacci level for support at 146.95, which is the 61.8% retracement of the recovery move that started last September.
The risk here is that markets pricing in rate cuts from the Fed could cause a rally in the Japanese Yen which brings USD/JPY back to that 140.00 level. And if that breaks, there could be even more motivation for hedges built around that carry trade to unwind. Similar to last July, that could eventually hit other asset classes as the leverage brought on by low rates in Japan quickly draws out of the market. So, there's some significant macro risk here, and this is one of the reasons why we saw such a strong breakout last week when it looked like that rate compression between the U.S. and Japan was not going to happen.
The big question now in USD/JPY is whether bulls step in to hold support. Two weeks ago, following Japanese elections, it was the 145.92 level that held support, and that remains a big line in the sand today. But, if we see sellers grind below 145.00, that could cause other current longs in USD/JPY to get cautious. - js
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Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.