The FX Trader: USDJPY key resistance in view as oil, yields pressure yen

Key markets are frozen in a range with the JPY closest to “breaking something” ahead of the US jobs report. Traders are reluctant to take nearly any asset out of the trading range established after the initial risk-off, USD positive reaction to the breakout of war in Iran as the Strait of Hormuz remains effectively shut. For those wondering how important this shipping route is, Craig Tindale offers an impressive overview of the critical importance to the entire global economy of this shipping route and all of the industries that are downstream of oil and gas coming from the region. The short message is that the damage to the global economy and global markets starts from day one but accelerates after a week of closure (Iraq has almost no on-shore storage, so its oil fields have already shut down, taking more than 3 million barrels of exports out of the global equation), After two weeks of closure the real impact picks up further and massive implications lie ahead if the Strait is closed or mostly closed beyond one month. Given where markets here just under a week after the war started, “expectations” are that this the straits are set to open soon, certainly far sooner than that 1-month time frame.

Struggling to see what the market gets from the US jobs report today. The employment situation and the direction of the US economy are of course critical, and we got some interesting evidence this week of strong activity in the Services sector with a strong ISM Services reading for February – the strongest since mid-2022. At the same time, the Fed Beige Book points anecdotally reported sluggish, if stable, growth and noted the K-shape of the US economy, with higher income households spending like there is no tomorrow, while middle- and lower income households were pulling back and financially strained. Any major surprise today in either direction, given nearly all other evidence pointing to a stable jobs market, might be read as a statistically (or even politically) driven blip and is unlikely to drive a strong directional move if nothing is resolved in the Iran conflict ahead of the weekend. The latter, it is easy to say, is the dominant focus.

Overall, besides the reality on the ground in the Middle East and the general ebb and flow of risk sentiment, it’s most important to watch whether US treasury yields and global bond yields more broadly continue to pressurize markets. Higher yields and energy prices are weighing against the yen and the euro the most. At some point, these energy and yield rises could add to the pressure on so far amazingly resilient US equity market risk sentiment (sentiment elsewhere is appropriately cautious, especially in Europe). More broadly crumbling risk sentiment would possibly offer some offsetting support for the yen, but is more unambiguously negative for EM currencies and pro-cyclical currencies like AUD, NZD and SEK.

Chart focus: USDJPY
Traders seem reluctant to push anything outside of its local trading range after the initial reaction to the war in Iran, and USDJPY may or may not be the exception around this key local 158.00-area resistance as we face an uncertain weekend ahead if nothing is resolved today in the war. As noted above, the US employment report doesn’t seem likely to produce surprises and even if it does, there is too much evidence that the US labour market is sluggish but stable to believe the notoriously unreliable official data on its initial release. Traders focusing on Ichimoku levels will note that the two key bearish pillars have been removed for now: first, the lagging span (thick green line) has crossed above the price bars, and second, the price action is now well clear of the now very narrow cloud. It will take some considerable doing to get the chart back on a bearish path. In the meantime, we have endless layers of resistance from here near 158.00 to the nominal highs above 159.00 and psychological level of 160.00 before the big 2024 high of 161.95. More pain for global bonds and energy could feed further tests of the upside resistance levels. Bears would need a massive sell-off back down through the cloud to suggest the rally is capped for now.