USD/JPY: Japanese yen depends on the US dollar

The USD/JPY pair shows a strong upward trend: it rose by 200 points in just a week and a half, reaching the three-month highs. Despite small corrective pullbacks, the pair is steadily rising. Looking at the daily chart, any bearish candles were not observed since January 27. The general strengthening of the US currency amid the pessimistic rhetoric of the Japanese regulator allowed the buyers of USD/JPY to reach new peaks, recovering their lost positions.

Currently, the main resistance level of 106.00 (upper line of the Bollinger Bands indicator on the weekly chart) hovers in the range. We can assume that this target will be reached in just a matter of time. The yen fails to resist the dollar, as the USD bulls are supported by treasury growth and good macroeconomic reports. Therefore, if today's Nonfarm data enters the "green" zone, then the US currency will receive an additional reason to further strengthen. In this case, the level of 106 will most likely be reached today after the results of the key data in the United States.

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First, let's start with the problems of the Japanese currency. It should be noted that the Japanese yen paired with the US dollar reacts weakly to Japanese macroeconomic reports – it is primarily affected by external fundamental factors. The Japanese regulator also plays a decisive role, which becomes a victim to its "dovish" rhetoric. For many months, Haruhiko Kuroda has been allowing the easing of monetary policy parameters (if necessary), but the Central Bank does not dare to expand QE or even more so, reduce the interest rate further into the negative area. Moreover, one of the Council members voted against keeping the rate at the current level during the last meeting.

In general, the Bank of Japan's first meeting this year turned out to be very pessimistic. The regulator kept the monetary policy parameters unchanged, but at the same time worsened the GDP forecast for the current fiscal year, which ends in April. The downward revision of the forecast is related to the quarantine, which has been tightened in Japan since this year began. After the January meeting, it became known that the emergency regime was extended until March 7 (but apparently, this is not the final date). The regime operates in 11 of the 47 prefectures, where more than half of the country's population lives. In fact, we are talking about a lockdown with all the ensuing consequences – including for the national economy.

At the same meeting, the regulator decided to extend the additional repurchase of commercial papers and corporate bonds until the end of September this year. The Central Bank also maintained the annual volume of repurchases of securities of exchange-traded investment funds and assets of real estate investment trusts. They also have plans to buy an unlimited number of government bonds and continue to target the yield of 10-year government bonds at a level close to zero.

Analysts from the United Overseas Bank believe that BoJ will increase the volume of the stimulating program in March, when it assesses the effectiveness of existing measures. In fact, Kuroda noted at the January meeting that the Central Bank failed to raise inflation to the 2% target level despite all the steps taken. Due to the lockdown in Japan, inflation indicators will continue to show a decline. Therefore, it is clear that any adjustments to monetary policy will be on the way to easing.

Such a fundamental background suggests that the yen, paired with the US currency, will continue to move in the wake of the US dollar. The greenback, in turn, is influenced by several major fundamental factors – Nonfarm data, process of the aid package for the US economy, and the dynamics of Treasury yields.

It can be recalled that the last Nonfarm, which was published in early January, reminded us once again that the US economy is still under the influence of the coronavirus crisis. For the first time since the spring of last year, the number of employed in the non-agricultural sector declined (140 thousand), despite the general forecasts of minimal growth. The rest of the release was also disappointing. For example, the number of people employed in the private sector has also fallen by 98 thousand.

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The situation in January is expected to slightly improve. Here, the number of people employed in the non-agricultural sector is forecasted to rise by 77 thousand, while the private sector by 50 thousand. The manufacturing sector is also expected to grow by 30 thousand. At the same time. the unemployment rate should remain unchanged, that is, at around 6.7%. If experts' optimistic forecasts are not confirmed, then the US dollar will be under pressure again. In the context of USD/JPY, this means that buyers will get the chance to enter longs at a better price, since the upward trend is still in force. Moreover, political factors, as well as rising Treasury yields, will push the US currency upward, at least in pair with the Japanese currency.

From a technical viewpoint, the pair on the three bigger time frames (H4, D1 and W1) is either on the upper line of the Bollinger Bands indicator, or between the middle and upper lines, which indicates the priority of the upward direction. Meanwhile, H4 to W1 time frames (except for the monthly chart) shows that the Ichimoku indicator formed a bullish signal "Parade of Lines", when the price is above all the indicator lines, including the Kumo cloud. This signal indicates a bullish mood. The first upward target is the strongest resistance level of 106.00 (upper line of the BB on the W1).

The material has been provided by InstaForex Company - www.instaforex.com

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