Today’s Outlook for USD/JPY

The dollar-yen turned lower from the year-to-date high of 145.07 recorded on June 30th and yesterday fell sharply to 140.16, the lowest level in about a month and in the vicinity of the lowest level since June 16th. During this period, the daily candlestick chart broke below the Ichimoku Cloud Conversion Line, Base Line, Bollinger Bands Midline, and the 21-day moving average, while the bullish signal of a Three Line Strike reversal, which was suggested by the lagging line touching the 26-day previous candle, also disappeared. Technically, a rapid deterioration in the market can be confirmed.

The background of such a move (sudden distortion of the dollar-yen) includes: (A) suspicion that the US labor market is overestimated compared to its apparent numbers (resurgence of expectations for an early end to monetary tightening by the US Federal Reserve → decline in long-term US interest rates → selling of the US dollar), (B) persistent speculation of intervention by the Japanese government and the Bank of Japan to buy the yen, (C) expectations of an expanded allowance for yield curve control (YCC) at the Bank of Japan’s monetary policy decision meeting scheduled for July 28th, (D) expectations that the US June Consumer Price Index, which is scheduled to be released tonight, will further slowdown, and (E) unwinding of the yen carry trades before important events due to the unwinding of yen short positions that have accumulated to record levels, among other factors.

Amidst this, today’s focus will be on the US June Consumer Price Index, scheduled to be released at 21:30 Japan time, for the purpose of confirming the above-mentioned factor (D). The one-year ahead inflation expectations from the US Michigan Consumer Sentiment Index, which has already been published, declined sharply to 3.3%, and the one-year ahead inflation expectations from the New York Fed’s June survey also declined to 3.8%. Therefore, there is concern about a scenario where the US June CPI will further decline. If it falls below the market forecast of a year-on-year increase of 3.1%, there is a possibility that it could lead to a postponement of the 25bp rate hike at the FOMC meeting on July 26th (which is already more than 90% priced in), so particular caution is required for the downside risk of the dollar-yen during the overseas trading hours today (assuming a scenario of testing the previous low of 138.46 seen on June 1st if the CPI is weak. However, if it struggles to decline to the same level, there is also a possibility of a sharp rebound due to short coverings following the exhaustion of negative news). Furthermore, today, there are also scheduled events such as speeches by Richmond Fed President Barkin, Minneapolis Fed President Kashkari, Atlanta Fed President Bostic, and Cleveland Fed President Mester, as well as the US 10-year bond auction and the Beige Book.

Expected range for today: 138.50-141.5