This article was written exclusively for Investing.com
Over the last couple of days, the US dollar has pulled back against the Japanese yen. Investors have lightened up ahead of the publication of the December jobs report.
Interestingly, though, the USD/JPY did not react much in response to the hawkish FOMC meeting minutes. This may have been due to the sell-off in tech stocks, providing some mild support for the yen, which is deemed by many as a haven currency.
While the tech sector may be on a shaky footing and we might see a bit more weakness for the USD/JPY in the short-term, there is little doubt that this currency pair is headed higher in the longer term, and likely to remain supported regardless of the outcome of today’s jobs report.
For what it is worth, if US jobs and wages data beats expectations, this will further reinforce expectations about rate rises this year, potentially causing the disparity between US and Japan bond yields to grow even larger. This in turn should increase the appeal of the dollar for yield seekers.
Meanwhile if the data disappoints not too badly, it will still likely keep the Fed on track to lift rates in the months ahead and support stocks that have come under pressure because of rising yields. Thus, the safe-haven yen could weaken because of the potentially positive reaction in the equity market, supporting the USD/JPY. The only fundamental reason why the USD/JPY might sell off is if we see a sharp correction in the equity markets (and not just in tech names).
As far as trading the USD/JPY is concerned, well there is little point in trying to pick the top. Indeed, looking at the chart of the USD/JPY, the trend is clearly bullish. Rates have only just broken above the 2021 high and holding above the rising 21-day exponential moving average. The USD/JPY is also comfortably above the longer-term 200-day average, meaning even if we see a bit of correction, it will not materially change the longer-term technical outlook.
Aggressive traders may wish to look for long opportunities on any dips back into the 115.50 area, which was previously resistance. Conservative traders may wish to wait for evidence of renewed buying into that zone, or slightly lower, before getting on board. The bears meanwhile have little technical reasons to short this rally.
While prices may appear a little overbought, the rally could go on much further. I reckon 120.00 is on the cards. Regardless of whether we will get to 120.00 or not, what is important from a bearish point of view is that they will need to see a confirmed reversal signal first before stepping in. Unless that happens, the USD/JPY remains a strong BTFD trade (Buy The ‘Fabulous’ Dip).