Robust Momentum and Weak Inflation Drive USD/JPY Higher

USD/JPY moved higher extending above the Tokyo high in making 119.59 in early North American AM trade. Momentum on the daily chart is positive, and both the 20- and 50-day moving averages are holding up as supports, presently sitting at 118.57 and 118.81, respectively. A breach of recent highs would swing the Feb-11 peak at 120.47 back into scope.

Despite there being a muddy picture about whether the BoJ is or isn’t headed for further easing measures later this year, the USD/JPY has bullish momentum, as the Fed and BoJ are on sufficiently contrasting paths that favor the dollar. The interest rate differential which generally drives the path of the currency pair is moving in the US favor. The 10-year yield differential is now printing at 176 basis points the highest in the past two months.

Japan services PPI fell 0.5% in January after a 0.1% decline in December. That resulted in a slowdown in the annual pace to a 3.4% year over year clip in January, from a downwardly revised 3.5% year over year rate which was 3.6% year over year. Weakness last month was in transportation and property, casualty services. The data will be disappointing to the BoJ and the government which are continuing to try to boost inflationary pressures.

Prices sliced through the 10-day moving average near 119.-05, and is poised to test resistance levels near 120.50. Momentum has turned positive with the MACD (moving average convergence divergence) index generating a buy signal. This occurs as the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The index moved from negative to positive territory confirming the buy signal.

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