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USDJPY: Finally time to play with the JPY

04 September, 2014

By Jameel Ahmad, Chief Market Analyst at FXTM  

Since the USDJPY surpassed the 103 psychological resistance level around two weeks ago, which had acted as somewhat of a ceiling for the pair since early April, the USDJPY has been on quite the bull run.

The pair further advanced by around another 90 pips yesterday, following the latest United States Manufacturing ISM showing that the sector had expanded during August at a rate not seen since March 2011. Following the release, the pair traded as high as 105.203, before concluding Tuesday’s trading at 105.083.

Although the pair has advanced heavily recently, investors should pay some caution towards a potential pullback. The United States’ recently improved economic performances have raised expectations that the Federal Reserve could normalize monetary policy sooner than expected, but there is always a possibility that the Federal Reserve Beige Book released on Wednesday evening, or even one of the upcoming Federal Reserve speeches on Thursday may contradict expectations for a sooner than expected US interest rate hike. This occurring would halt the present USDJPY rally.

Additionally, there are a lower quantity of Japanese economic releases scheduled for the remainder of the week, with the major event risk being Thursday’s Bank of Japan (BoJ) Monetary Policy Statement. So far this year, the BoJ has remained confident in its belief that the Central Bank’s monetary goals remain achievable and consistency from the BoJ tonight should provide a reason for the USDJPY rally to pause slightly.

As the month of September progresses, I see the potential for the USDJPY to continue moving higher. An awareness from investors that the Federal Reserve will conclude Quantitative Easing (QE) in October should enhance demand for the Greenback. Similarly, an increased frequency of deteriorating Japanese releases showcasing the detrimental impact the April sales tax is having on Japanese economic data (which has even promoted an emergence of fears that a period of stagnation may be heading in Japan’s direction), will only enhance suspicions that the BoJ will need to add further stimulus.

In reality, as long as the US economy can maintain the current economic consistency, JPY weakness is what really holds the key for the USDJPY to elevate higher in valuation.

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