Forex Outlook: GBP/JPY, USD/CAD, USD/JPY

GBP/JPY powerless within a range, USD/CAD weakens [Video]

(Christina Parthenidou – XM)

GBP/JPY powerless within a range

GBPJPY has been congested under its 20-day simple moving average (SMA) for more than a month now despite receiving strong defense from the March ascending trendline.

From a technical perspective, the bulls seem to be lacking incentive as the RSI keeps flattening just below its 50 neutral mark and the MACD remains stable around its red signal line and below zero.

Perhaps a clear break above the 162.18 – 163.00 area, which encapsulates two trendlines, the 50-day SMA, and the 38.2% Fibonacci retracement of the 150.96 – 168.70, is needed to motivate an acceleration towards the surface of the bearish channel at 164.53. Note that the 23.6% Fibonacci is also positioned here. A decisive close above it could brighten the short-term outlook, likely bolstering upside forces up to July’s resistance at 166.31.

On the downside, a close below the March trendline at 161.11 could aggressively pressure the price towards the channel’s lower boundary seen around the 50% Fibonacci of 159.86. Should the 200-day SMA at 159.35 give the green light to the bears too, the pair could dive towards the 158.00 round level, a break of which would downgrade the neutral medium-term trajectory.

In brief, GBPJPY is maintaining a neutral-short-term bias. A move above 162.18 or below 161.11 is likely needed to generate some volatility in the market.

USD/CAD weakens after bullish rally in near term

USDCAD is showing some signs of weakness after three straight green days and a spike near the 20-month peak of 1.3225.

In trend indicators, the 20- and 50-day simple moving averages (SMAs) posted a bullish crossover, confirming the bullish bias in the short- and long-term timeframe. The technical oscillators are presenting some contradicting signs. The MACD is holding well above its trigger and zero lines; however, the stochastic created a bearish crossover within its %K and %D lines in the overbought region, while the RSI is ticking lower in the positive area, suggesting a bearish correction.

The 1.3175 barrier and the 20-month high of 1.3225 could challenge any bullish attempts towards a fresh high until 1.3385, registered in October 2020. Hence any breakout at this point may gather extra attention, with the price likely speeding up to 1.3420 – a key barrier during the September 2020 period.

Alternatively, an extension below 1.3060 will strengthen a negative movement, likely activating a fresh bearish wave towards the short-term SMAs at 1.2915 and the 1.2900 psychological mark. Failure to hold above that floor could cause another negative extension towards the 200-day SMA at 1.2775.

In brief, USDCAD is still in positive territory and only a drop underneath the 200-day SMA and the long-term ascending trend line may switch the picture to bearish.

How far can USD/JPY go?

(Jing Ren – Orbex)

The yen has weakened to the lowest level since 1998, with the USDJPY popping above the 140 handle. Through the week, the pair rose 1,9%. In a period of economic uncertainty, usually traders would expect the yen to get stronger on safe-haven flows. Is the yen no longer a safe haven? There’s more to the picture. And that could help us understand if there is a correction coming or the trend will continue.

The driving forces

In the short term, the dollar has gotten stronger ahead of NFP data. This is because traders are banking on the employment data to be strong, well above the “normal” 200K rate seen before the pandemic. With fast growth in jobs, the Fed would have free reign to keep hiking, pushing yields even higher.

So, from that we can see a potential source of a correction in the near term: if NFP figures disappoint. After the blow-out figure from last month, investors might be a little overly optimistic about a beat in jobs creation, which means even if the figures come in as expected, it could disappoint the more speculative traders.

The bigger picture

The short term dynamics are an example of the effects of the long-term situation. The major deviation between the two premier safe haven currencies is, broadly speaking, a difference in monetary policy. The US is facing high inflation, prompting the Fed to raise rates. Japan has relatively low inflation (even though it has poked above target recently), and rates have remained negative.

With the Fed pursuing an aggressive hiking policy, the yield spread has widened, making it attractive for carry trading against the yen. The potential for a reversal is that Japan starts experiencing inflation and forces the BOJ to start easing. The weaker yen translates into higher import prices, which in turn implies inflationary pressures. However, the global slowdown could also be translating into lower retail sales in Japan, which in turn minimizes the inflationary pressure. As a result, the BOJ can remain apart from the other central banks desperately fighting inflation, and instead work on promoting economic growth.

It’s all about the expectations

A lingering question might be: Sure, the Fed is raising rates, but inflation is much higher than interest. Doesn’t that mean a real negative rate?

Yes, it does. However, the inflation that we’re seeing now is in the past. It’s comparing prices now to prices a year ago. What matters for investors is how much inflation is expected over the next period. Fed tightening implies that inflation should get under control, meaning that holders of US bonds will get the benefit of higher interest rates and lower inflation. Meaning that forward yield expectations are still positive – or, at least, better than what traders might expect to get from yen bonds.

While the BOJ is on an accommodative track, inflation would have to increase substantially before rates rise. Meaning there is more inflationary risk in a Japan that isn’t actively fighting inflation, than in a US that is actively trying to get prices down. It isn’t that the yen isn’t a safe haven, it’s that the US has moved more into offering a better rate of return on fixed income.

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