09-May-17 / Yen 113.72/ US-Japan 10Yr yield spread 2.36%

EXECUTIVE SUMMARY:

Recap: Dollar-Yen has bounced back from levels just above 108, mentioned as the low for Apr-Jun quarter in our previous report. Now, looking at the next 2-3 months, the currency pair could remain ranged within 108-115 region with a possible extension to 116-118 levels.  

USD/JPY Monthly Candles

Dollar Yen has come down from levels near 118.66 since the last 4-months. While the important support near 108 holds, we could possibly expect a rise towards 114.50 in the coming weeks with a possible extension towards 115-116. Thereafter a fall back towards 108 is possible. Overall a sideways movement within 116-108 is possible till Sep’17 before a sharp break on either side (120 or 105).

Alternatively, we also look for possibility of breaking above 115-116 resistance levels in the first attempt. This is less preferred for now but has a decent chance that the current bounce from 108 could extend towards 120.

Quarterly Projections

We keep readings for 3-quarters within the 116-108 region intact with a possible extension to 118 or 106 on either side of the range. Thereafter, we would have to wait for confirmation of a break on either side to decide on further course of movement.

US Real Interest Rates

 The US Real interest (0%) rates and Dollar-Yen have good directional correlation and both seem to be heading towards a near term resistance above current levels. In case the respective resistances near 0% and 114.50 hold, we may see a sharp decline in the near term.

We prefer continuation of the current rise at least till mid-June before a decline starts. Although there is enough room on the downside for a sharp decline in both the yield spread and Dollar-Yen, there could be some consolidation or range bound movement before the actual fall. Only on a break above the current resistances would we shift our focus to an upside possibility (120 on USDJPY, 0.44% on US Real Interest Rates).

US-Japan 10Yr Yield Spread

The US-Japan 10Yr yield (2.34%) spread could rise towards 2.40-2.50% before coming off to test 2.2%. in that case there could be a possible triple top formation followed by a corrective fall.

Good directional correlation is visible between the yield spread and Dollar-Yen. Overall both could remain range bound for the next couple of months before taking a call on further direction.

Conclusion

 A rise in Dollar-Yen towards 115-116 before falling off towards 108 is the preferred course of movement for the next 3-4 months. A possible extension towards 106 or 118 is open.

Alternate Scenario: The current bounce from support near 108 could break above 115-116 and rally towards 120 without seeing any correction from 115-116. In that case the medium term outlook would be very bullish. We give lesser preference to this just now (about 40%).