Takaichi’s victory triggered a “sell the fact” reaction in USDJPY; Eyes on the US NFP next

FUNDAMENTAL OVERVIEW

USD:

The US Dollar weakened
across the board yesterday despite the lack of catalysts. Most analysts blamed
the report saying that China urged its banks to cut their exposure to US
Treasuries. In such a case you would expect a negative reaction in bonds, but
they finished the day higher. We did see a spike in the greenback following the
report, but the real weakness started much later, so I wouldn’t say that was
the catalyst.

This is just the continuation
of the pullback triggered by some dovish repricing on last week’s stock market
selloff and weak US Job Openings. Given the lack of catalysts, the market just
kept on moving by inertia. Moreover, there might be noise ahead of the key US economic
reports in the next days. The focus is on the US NFP report tomorrow as that
will likely be pivotal for the US Dollar.

In fact, the market is
pricing 58 bps of easing by the Fed this year, so there’s a high risk of a
hawkish repricing in case the data comes out strong. In such a scenario, we
will likely see the greenback rallying across the board.

On the other hand, a weak
report should strengthen the case for more Fed easing and might even see
traders bringing forward rate cut bets as some Fed members expressed scepticism
about labour market stabilisation. In that case, the US Dollar will likely come
under renewed pressure on dovish Fed bets.

JPY:

On the JPY side, nothing
has changed other than PM Takaichi winning the lower house election as widely
expected. We saw a classic “sell the fact” trade on the news with the JPY
rallying across the board. In terms of monetary policy, the BoJ held interest
rates steady as expected at the last policy meeting and upgraded slightly
growth and inflation forecasts due to the expansionary fiscal policies.

Governor Ueda didn’t offer
anything new in terms of forward guidance as he just repeated that they will
keep raising rates if the economic outlook is realised. He also added that
April price behaviour will be a factor to mull over a rate hike. This suggests
that April is when they expect to deliver another rate hike if the data
supports such a move. The data since the meeting hasn’t been supportive for a
rate hike though as the Tokyo CPI eased further.

USDJPY TECHNICAL
ANALYSIS – DAILY TIMEFRAME

On the daily chart, we can
see that USDJPY dropped
yesterday as we got the classic “sell the fact” trade on the widely expected Takaichi’s
victory. The price is now trading right in the middle of the intervention level
around the 159.00 and the major trendline. There’s not much we can glean from
this timeframe, so we need to zoom in to see some more details.

USDJPY TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAME

On the 4 hour chart, we can
see an upward trendline defining the bullish momentum. The buyers will likely
step in around the trendline with a defined risk below it to position for a
rally into the 159.00 handle. The sellers, on the other hand, will look for a
break lower to pile in for a drop into the major trendline.

USDJPY TECHNICAL
ANALYSIS – 1 HOUR TIMEFRAME

On the 1 hour chart, we can
see a minor downward trendline defining the bearish momentum on this timeframe.
The sellers will likely lean on the trendline with a defined risk above it to
keep pushing into new lows. The buyers, on the other hand, will look for a
break higher to increase the bullish bets into the 159.00 level next. The red
lines define the average daily range for today.

UPCOMING CATALYSTS

Today we get the US December Retail Sales and the US Employment Cost Index
data. Tomorrow, we have the US NFP report. On Thursday, we get the US Jobless
Claims figures. On Friday, we conclude the week with the US CPI report.