Over the last week, the yen has taken the brunt of the seemingly co-ordinated central-bank attacks on easy money. With so-called ‘peak QE’ now a potential reality and ultra-low interest rates relegated to the history books, the Japanese currency has tracked lower as yield differentials widen in favor of the other major currencies. This outlook for relative central-bank policy represents a definite near-term headwind for yen, just as buoyant stock markets refuse to show much weakness.
Today's Fed minutes will offer a bit of insight into the Feds intention to raise interest rates for a third time this year. Attention will also be paid to the sequencing of tapering and a possible start date. With speculation that Yellen may leave the Fed in the early part of next year, some market participants are suggesting that she will want to initiate the start of the taper process. Whether this balance-sheet reduction is a substitute for higher rates will be the key question here.
As for USD/JPY, prices have rallied in concert with rising US bond yields over the last two weeks. We have written before about the strong correlation of the US 10-year yield to this major currency pair. Near-term, the rally reached 113.47 on Monday and prices consolidated Tuesday before reaching a high today of 113.68. However, poor US data in the form of US factory orders has disappointed and we have seen a bout of yen strength.
Support
Tuesday’s low at 112.74 is key short-term support going forward. What is also noteworthy is that the 50- and 100-day moving averages are converging. Price action indicates that we now need to to see a decisive break above 113.50 for bullish continuation. 114.00 and then the May highs of 114.36 will come into play. However, any sense that balance-sheet tapering will take place instead of interest-rate hikes will push the pair lower. Of course, if the Fed minutes don’t take us through either of these levels, we still face Friday's US employment data to contend with.