USD/JPY Outlook (13/July/2023)

The USD/JPY pair turned downward after reaching its year-to-date high of 145.07 on June 30 and yesterday experienced a sharp decline to 138.16, the lowest level in about a month and a half (within the range of the lowest level since May 22). During this period, the daily candlestick chart broke below the Ichimoku Conversion Line, Base Line, Bollinger Mid-Band, and the 21-day moving average, in addition to showing a strong bullish signal reversal and the disappearance of the Dow Theory’s uptrend, indicating a clear deterioration in the market sentiment from a technical perspective (although the upper limit of the Ichimoku Cloud provided support last night, there is a relatively high possibility of breaking below the same level and further decline, which needs to be warned against).

Furthermore, from a fundamental perspective, (1) there are speculations that the labor market in the United States is being overestimated compared to the actual figures, (2) expectations of inflation deceleration in the United States, (3) speculation of a pause in monetary tightening by the Federal Reserve due to the aforementioned reasons (interest rate hike expectations for the year reduced from two to one, leading to a sharp decline in long-term US yields and a significant decline in the dollar against major currencies), (4) expectations of a revision of the Bank of Japan’s monetary easing (speculations that the BOJ’s Yield Curve Control wider band will be implemented at the policy decision meeting scheduled for July 28), and (5) unwinding of yen short positions (yen carry trades) that have reached their highest level in history. These factors are increasing the likelihood of further decline in the USD/JPY exchange rate.

Amidst these circumstances, today’s focus will be on the US June Producer Price Index, scheduled to be released at 21:30 Japan time, to confirm the aforementioned inflation expectations. As the one-year-ahead inflation expectations in the US Michigan Consumer Sentiment Index, the New York Fed’s survey for June, and the US CPI for June have all been decelerating, a deceleration scenario is considered likely for today’s US PPI as well. If the result is below market expectations, expectations for subdued inflation in the US will further increase, and it is anticipated that the USD/JPY may accelerate its decline. Therefore, our main scenario for today is to expect a further decline in the USD/JPY exchange rate (if the US PPI is weak, there is a risk of further decline towards the 137.15 level where the 200-day moving average is located and the 137.02 level where the 90-day moving average is located).

Expected range for today: 137.25 – 139.25.