FX Update: USDJPY pulling into important levels. FX Update: USDJPY pulling into important levels. FX Update: USDJPY pulling into important levels.

FX Update: USDJPY pulling into important levels.

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  While the USD is weak, the JPY has lurched into a cliff-dive, taking USDJPY within reach of major 114.50 area resistance and the psychologically significant 115.00 level. Elsewhere, the weak US dollar and tame US treasury yields have helped further boost risk sentiment and commodity currencies. Today, we watch the US October preliminary University of Michigan sentiment survey with considerable interest as a possible microcosm of what is going on here.

FX Trading focus: JPY over a cliff, getting overdone. UMich sentiment in the spotlight

USDJPY has continued to soar almost without a hitch, with the 114.50 next major chart resistance swinging into view all at once on the backdrop of soaring commodities prices (Japan totally reliant on commodities imports, particularly so in energy) and despite US long treasury yields that have suddenly been tamed this week. That requires other supportive factors for JPY bears, including the commodities issue noted above, strong risk sentiment, rising yields at least at the front of yield curves if not at the long end, but possibly also due to the political shift here. Namely, Prime Minister Fumio Kishida is sending out signals that he will seek to reduce inequality and spoke out rather strongly against the neoliberalism of Abenomics. This is a currency negative development at the margin, although a capital gain tax proposal has already disappeared after it was floated recently and cratered Japanese equity markets.

So how low can the JPY go? It is within two percent of the very cheapest level, on a broad CPI-adjusted real effective basis, as shown in the chart below. I suspect it will only firm up on some combination of global credit markets beginning to deteriorate, global yield curves suggesting a recession over the horizon (too early), and importantly, if and when the burst higher in commodities is reversed. By the way, I find the simultaneous rallies in commodities, particularly in energy,  and equity markets/risk sentiment entirely incompatible in the medium term. Surging energy prices are often at the root of recessions and we are getting there with the recent price rises if these persist much longer.

The real-effective CPI-adjusted JPY rate is getting toward an historic low (inverted on chart below) as USDJPY soars into the major 114.50 area that capped the action for much of 2017 and 2018. Remember that due to lower inflation in Japan relative to the US, that the “fair value” exchange rate crawls lower over time as long as that remains the case, such that 115 today is similar to 125 back in the 2015 time frame. USDJPY has long history of finding big round numbers sticky psychologically – interesting to see if 115.00 proves similar this time around. 

Source: Bloomberg

US September Retail Sales and October Preliminary University of Michigan sentiment up today. The US Retail Sales remains in an interesting data series to watch after the crazy surges and retreats of last year and early this year on the series of stimulus checks issued by the US government. We should be mostly clear of that effect, but the “stimulus cliff” means that rising Retail Sales require a confident consumer that is willing to spend out of savings as well as income in the near term. Consensus is looking for a modest month-on-month drop of –0.2% at the headline and +0.4% ex Auto and Gas after the very strong +2.0% gain in the latter in August.

Also worth watching, more than in many years, is the University of Michigan sentiment index, which has stumbled badly in recent months and actually posted a worse reading in August than during the worst initial phase of the pandemic outbreak before bouncing very slightly in September. Is this on popular concerns about rising prices or ongoing covid irritations and even disruptions caused by supply shortages and even vaccine mandates or all of the above? The initial October reading today is expected near unchanged, and possibly most compelling to watch is whether the 5-10 year inflation expectations in the survey are becoming unanchored. In September, this survey rose back to the decade high at 3.0% at the median, while the “average” 5-10 year inflation expectations are at multi-decade highs, save for a brief period in 2008 when oil prices were ramping above 100 dollars/barrel for the first time.

Sterling shakes off BoE dovish push-back. Sterling was unable to fully participate in the full court press against the US dollar late yesterday. While key resistance in GBPUSD above 1.3670 did give way and the pair traded all the way to 1.3734 yesterday, the gains were capped and the pair closed weakly back below 1.3700. Similarly, EURGBP traded to new local lows and down toward the post-Brexit low of 0.8450, but rallied back into the range late yesterday – an interesting sign of weakness despite the supportive backdrop of strong risk sentiment. The culprit was two Bank of England officials (Mann and the very dovish Tenreyro) out late yesterday suggesting that talk of an imminent rate hike is premature, reversing some of the recent rise in short UK rates. The sterling softness has been quickly neutralized today as UK short yields have steadied and on the backdrop of strong risk sentiment, which is probably the most important driver for GBP here anyway.

Table: FX Board of G10 and CNH trend evolution and strength
The negative JPY trend has reached a remarkable extreme into a Friday – next week to provide more two-way action as 115 in USDJPY approaches?

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
Will watch whether flip to negative USD trend in many places holds into early next week – also note the extreme reading for some of the JPY crosses, at 11+ in some cases.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Oct. Empire Manufacturing
  • 1230 – US Sep. Retail Sales
  • 1230 – US Sep. Import Price Index
  • 1400 – US Preliminary Oct. University of Michigan Sentiment/Inflation expectations
  • 1545 – US Fed’s Bullard (non-voter) to speak
  • 1620 – US Fed’s Williams (voter) to speak

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992