USD/JPY Rate Eyes September High Amid Ongoing Rise in US Yields

Japanese Yen Talking Points

USD/JPY approaches the September high (112.08) as the 10-Year US Treasury yield climbs to a fresh monthly high (1.57%), and current market conditions may keep the exchange rate afloat amid the deviating paths between the Bank of Japan (BoJ) and Federal Reserve.

USD/JPY Rate Eyes September High Amid Ongoing Rise in US Yields

USD/JPY extends the series of higher highs and lows from the start of the week to largely track the ongoing advance in longer-dated Treasury yields, and the exchange rate may stage another attempt to test the 2020 high (112.23) as the Non-Farm Payrolls (NFP) report is anticipated to show a further improvement in the labor market.

The update is anticipated to show the US economy adding 473K jobs in September following the 235K expansion the month prior, while the jobless is expected to narrow to 5.1% from 5.2% during the same period, which would mark the lowest reading since March 2020.

A positive development may generate a bullish reaction in the US Dollar as it puts pressure on the Federal Open Market Committee (FOMC) to switch gears sooner rather than later, and USD/JPY may continue to exhibit a bullish trend ahead of the next Fed interest rate decision on November 3 as the BoJ sticks to its easing cycle.

In turn, USD/JPY may continue to trade to fresh yearly highs over the remainder of the 2021 amid speculation for a looming shift in Fed policy, but a further advance in the exchange rate may fuel the flip in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment report shows 35.31% of traders are net-long USD/JPY, with the ratio of traders short to long standing at 1.83 to 1.

The number of traders net-long is 8.88% lower than yesterday and 23.70% higher from last week, while the number of traders net-short is 4.61% higher than yesterday and 23.51% lower from last week. The jump in net-long interest has helped to alleviate the tilt in retail sentiment as only 27.83% of traders were net-long USD/JPY last week, while the decline in net-short position comes as the exchange rate extends the series of higher highs and lows from the start of the week.

With that said, USD/JPY appears to be on track to test the September high (112.08) amid the rise in US yields, and the NFP report may lead to another test of the 2020 high (112.23) if the update fuels speculation for an imminent shift in Fed policy.

USD/JPY Rate Daily Chart

Source: Trading View

• The broader outlook for USD/JPY remains constructive as it trades to fresh yearly highs in the second half of 2021, with the 200-Day SMA (108.55) indicating a similar dynamic as it retains the positive slope from earlier this year.
• In turn, USD/JPY appears to be on track to test the September high (112.08) as it extends the series of higher highs and lows from the start of the week, but need a close above the Fibonacci overlap around 111.10 (61.8% expansion) to 111.60 (38.2% retracement) to raise the scope for another test of the 2020 high (112.23).
• A break above the 2020 high (112.23) to open up the overlap around 112.40 (61.8% retracement) to 112.80 (38.2% expansion), with the next area of interest coming in around 113.80 (23.6% expansion) to 114.30 (23.6% retracement).
• However, lack of momentum to close above the overlap around 111.10 (61.8% expansion) to 111.60 (38.2% retracement) may push USD/JPY back towards the 110.70 (38.2% expansion) region, with the next area of interest coming around 109.40 (50% retracement) to 110.00 (78.6% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong