The USDJPY pair rallied to the highest level since February 2020 as investors reflected on the overall strong greenback and the country’s new prime minister. It is trading at 111.85, which is more than 9% above the lowest level this year.
Stronger US dollar
The main reason why the USDJPY pair rallied is mostly because of the stronger US dollar as global risks rise. The US dollar index, which measures the performance of the greenback against other key currencies, jumped to the highest level since November last year.
There are several reasons why the US dollar index has rallied exponentially recently. First, the global economy is currently facing a key inflation challenge, which could push many central banks to embrace a tightening policy. For one, China, the biggest manufacturer is going through a major power shortage as the price of coal and natural gas rallied. The same trend is happening in countries like the UK.
Second, the US dollar has rallied because of the rising bond yields in the US. The yield on the 10-year government bond rose to a three-month high of 1.55%. The 30-year yield rose to more than 2% as the market predicted that the Federal Reserve will likely embrace a more hawkish tone in the coming months.
Third, there is an ongoing risk that the American government will default on its local and international obligations. Senate Republicans have asked Democrats to go on their own in raising the country’s debt ceiling. This is an impossible task since a vote to expand or suspend the debt ceiling will need 60 Senators. With time running out, there is a likelihood that default will happen.
The USDJPY pair also rallied after Japan moved closer to having a new prime minister. The ruling party voted for Fumio Kishida to become the new leader. This effectively makes him next in line to succeed Yoshihide Suga, the current premier who is resigning.
Analysts expect that the new prime minister will not radically change the policies of either Shinzo Abe or Suga. This means that he will likely retain Haruhiko Kuroda as the Bank of Japan (BOJ).
Meanwhile, data published on Thursday showed that Japan’s economy is under pressure. Retail sales tumbled by 3.2% in August after expanding by 2.4% in the previous month. This is notable since the retail sector is a major component of the country’s economy.
Additional data showed that the country’s industrial production declined by 3.2% in August. Housing starts and construction orders also declined during the month.
But there’s hope for the country now that the government has increased its vaccination rollout. Also, the government has announced that it will do away with the state of emergency that has been in place in several provinces. This will likely lead to more business production and higher demand.
The USDJPY will next react to the latest American GDP and initial jobless claims numbers scheduled for Thursday.
The daily chart shows that the USDJPY made a major bullish breakout recently when it moved above the key resistance at 110.46. The pair had struggled moving above this level several times before.
It has moved above the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has moved to the overbought level. The pair also rose above 110.60, which was the highest level on July 1.
Therefore, the USDJPY will likely keep rising as bulls target the next key resistance level at 112.50.