USD/JPY Headed Back To 111?

There was very little movement in currencies on Monday and this lack of volatility could be indicative of trading for the rest of the week. With no major U.S. economic reports scheduled for release and Fed Chair Janet Yellen not speaking again until after the markets close on Friday, political headlines are the only hope for volatility in the greenback. Traders should be watching for any news on the selection of a Fed chair, North Korea and any progress or setbacks on tax reform. Yellen, who has a 90% chance of losing her job in February spoke on Sunday and her comments were relatively hawkish. She said employment should bounce back after weak September and her best guess is that soft inflation readings won’t persist. Most importantly, she felt ongoing economic strength warranted gradual rate hikes, which suggests they are on track to raise interest rates one more time this year. These positive comments along with the stronger than expected Empire State manufacturing survey helped USD/JPY avoid further losses as manufacturing activity in the NY region grew at its strongest pace in more than 3 years. However looking ahead we believe USD/JPY is vulnerable to additional losses as U.S. and South Korea military exercises begin. A Fed chair announcement is also expected any day now and anyone but Yellen would be perceived as dollar negative and anyone but Powell or Warsh (the 2 leading contenders) could send USD/JPY below 111.00.

Technically while USD/JPY has bounced off the 200-day SMA, its finding resistance at the 20day SMA on the 4 hour charts. The weekly charts also show major resistance between the 50-week SMA at 112.14 and the 50% Fib retracement of the 2015-2016 decline near 112.60. If USD/JPY breaks the 200-day SMA at 111.75, the next stop should be 111.10.