USDJPY Advances on Strong Dollar and Weak Japanese Data

The USDJPY has hit a new five-year high following the greenback’s strength amid a series of events that had boosted demand for the US dollar. The US Dollar Index (DXY) which gauges the currency’s strength against a basket of rival currencies, is hovering slightly below 99, after hitting near the highest point since May 2020.

Russo-Ukraine conflict

The ongoing invasion of Ukraine by the Russian military continues to weigh on risk sentiments, with investors moving their money away from riskier assets like stocks and cryptocurrencies in favour of safer assets like the US dollar. With death tolls and tensions on the rise in Ukraine, the uncertainty on further escalation involving a nuclear or chemical attack will continue to buoy the greenback against other currencies.

Sky high inflation and hawkish Fed

Another major reason that has given the US dollar its strength is another record inflation in more than four decades. The US Consumer Price Index rose by 7.9% in February, higher than 7.5% in January, as expected. Although a 25 basis point rate hike in the March FOMC meeting is priced into the financial markets, this latest inflation figure further enforces a hawkish expectation on the Fed, which may turn more aggressive in the subsequent meetings in 2022.

Downbeat Japanese data

The steep depreciation of the Japanese yen against the dollar could also be attributed to a series of discouraging economic data coming from Japan in the past week. Firstly, the Current Account released by Japan’s Ministry of Finance showed a higher deficit of -1188.7 billion yen, as compared to the previous month of only -370.8 billion yen. A current account deficit indicates that there is a net capital outflow in goods, services and interest payments. A low reading is normally bearish for the country’s currency. Moreover, Japan’s fourth-quarter Gross Domestic Product also disappointed the market consensus with a growth of only 1.1%, lower than the previous quarter growth of 1.3%. The data has weighed on the Japanese yen as its economic outlook takes another hit.

Technical Analysis

USDJPY is creating higher highs after breaking out of an inverse head and shoulders pattern that spanned from April 2020, on 11^th October 2021. After the breakout on the weekly chart, the pair successfully retested the inverse head and shoulders neckline resistance and established support above it. Relative Strength Index (RSI) is bullish and resides above the overbought level at 70, signalling caution for a short-term retracement. The Moving Average Convergence Divergence (MACD) indicates that bullish momentum is in full swing with MACD histogram above the signal line.

Looking ahead, we expect USDJPY to rise and test 120.39 (R2) which is the inverse head and shoulders target. In the meantime, dynamic support trend line connecting USDJPY’s lower lows since September 2021 will provide support for the pair.

Tuesday, March 15

USD – Producer Price Index ex Food & Energy (YoY)(Feb)

Wednesday, March 16

JPY – Exports (YoY)(Feb), Imports (YoY)(Feb), Merchandise Trade Balance Total(Feb), Industrial Production (YoY)(Jan)

USD – Retail Sales (MoM)(Feb), Retail Sales Control Group(Feb)

Thursday, March 17

USD – Fed Interest Rate Decision, Fed’s Monetary Policy Statement, FOMC Economic Projections, FOMC Press Conference, Housing Starts (MoM)(Feb), Initial Jobless Claims(Mar 11), Philadelphia Fed Manufacturing Survey(Mar).

Friday, March 18

JPY – National Consumer Price Index (YoY)(Feb), National CPI ex Food, Energy (YoY)(Feb), National CPI ex-Fresh Food (YoY)(Feb), BoJ Interest Rate Decision, BoJ Monetary Policy Statement, BoJ Press Conference