USD/JPY: what's limiting growth?

September 29, 2014

USD/JPY was range bound in the past week: the pair was capped by 109.50 in the upside and supported by 108.50 on the downside.

Among the positive factors for this pair we can mention good data from the US and the difference in the monetary policy of the Federal Reserve and the Bank of Japan. In addition, Japan’s welfare minister said that the reforms of the country’s giant pension fund would continue as planned. It was negative for JPY and positive for USD/JPY, as this fund will likely increase purchases of the overseas assets and while doing so it will sell yen. Moreover, Japanese inflation numbers came out lower, and the BOJ may be forced to step in with additional monetary stimulus.

Among the negative factors for USD/JPY we should mention risk aversion created by geopolitical tensions as the US and allies conducted air strikes of the Islamic State in Syria. In addition, Japanese Prime Minister Shinzo Abe expressed concerns about how the recent weakness of yen affects the regional economies.

All in all, the fundamentals still point at higher USD/JPY. The pair is still to reach our target at 110. We believe that Japan is interested in weaker yen, and only above this mark there may be some verbal interventions from Japanese officials. The pair is on its way to close above the 200-month MA at 106.50 in September, and this is a long-term bullish sign. At the same time, the charts show that USD/JPY is greatly overbought. The pair hasn’t even made a 23.6% correction, so watch for 107.70 and 106.90 on the downside. Next week Japan will release industrial production, retail sales and business activity data

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