The FX Trader: Can USDJPY join the broader weak USD picture?

What to know

USD bears retake control. The US dollar outlook was finely balanced early last week after the critical EURUSD pair had reversed all the way back below the pivotal 1.1800 area from its spring the prior week to 1.2100+. Alas, the USD bears survived the challenge and yesterday’s smart EURUSD rally and broad USD sell-off helped revive the USD bear case. Sure, there is plenty of suspense for the remainder of this week with US January Retail Sales up today, the delayed US January employment report up tomorrow and the January CPI data on Friday, but the direction of travel looks clear without major positive shockers.

Helping kick off the USD sell-off yesterday was China discouraging its banks from holding US treasuries at the start of the week. China seems to be signaling that it wants a firm and steady repricing of its currency higher to boost its prestige and to encourage its use in trade transactions and possibly as a store of value. There is enormous room for further CNH strength on the USDCNH chart without challenging any historic levels. China may pursue a sure and steady approach to further declines, but possibly checking the action at some point to discourage excess speculation.

Japan’s election – market buying the fact and more to come? In Japan’s election this weekend, PM Takaichi’s gambit to boost her power paid off handsomely as her party achieved a super-majority of two-thirds in the lower house, its strongest standing ever. This was supposedly the result that should have weakened the JPY the most and spooked the JGB market as it reward Takaichi with the strongest of mandates. Alas, she and her team are well aware of the risks and are moving to reassure markets. On Tuesday, Takaichi said she would look to build trust with markets and would not grow JGB issuance to fund sales tax cuts. The longest JGB’s have found strong buying interest since the election Sunday, with the 30-year and especially 40-year benchmarks plunging overnight. The latter hit is lowest yield in a month. Being bullish the JPY has been the widow-maker trade of the last year, so we won’t try to call a strong turn here, but the backdrop of JGB stability looks supportive and at worst, Japanese officialdom likely wants to discourage new lows. USDJPY still has a lot of work to do to look bearish – staring with a move below that 152.10 low from two weeks ago, followed by a break below the 150.00.

Chart focus: USDJPY
The back-up in USDJPY found resistance in the wake of the Japanese election and as PM Takaichi was out attempting to reassure markets overnight. While the longest JGB’s have found strong support this week, the JPY comeback still looks a bit feeble- with a lot more work to do before USDJPY joins the broader bearish USD story. The first key would be a takeout of the 152.10 pivot local pivot, but 150.00 is the bigger psychological level to the downside.