USD / JPY rises to 114.50 amid risk appetite, good US data and stimulus news from Japan

• USD / JPY is experiencing some strength after Wednesday’s sharp decline.
• After bouncing off 114.00, strong US data, risk appetite and stimulus news from Japan support the case for a higher USD / JPY.

After enjoying its biggest drop in a day since August on Wednesday, the USD/JPY it is trading a bit firmer on Thursday. USD / JPY reached its highest levels since early 2017, just shy of the 115.00 level at the beginning of Wednesday’s session, but then reversed sharply to end the session just above 114.00, a drop of 0.64%. Having continued to flirt with the 114.00 level during Thursday’s Asian session, the pair has recovered somewhat since then. It is now trading around 114.40, up 0.3% on the day, with the bulls targeting a test of the 114.50 level.

The main driver of Wednesday’s slide was a decline in US bond yields; 10-year US yields fell from a three-week high of 1.65% to less than 1.60%. The 10-year yield is unchanged at the beginning of the US trading session, so it doesn’t offer much momentum for the USD / JPY exchange rate. The reason for the rally is likely due to buying on dips, which has been a profitable strategy for USD / JPY traders in 2021.

Fundamental events also appear to support the case for USD / JPY to continue to regain ground lost on Wednesday. US economic data released Thursday was upbeat, with initial weekly jobless claims falling to a new post-pandemic low at 269,000 and the Philadelphia Fed manufacturing survey showing an improvement in business conditions to beginnings of November.

Meanwhile, reports from Japan last night showed that the Japanese government decided on a much larger than expected 55T yen fiscal spending package, which would be the largest of its kind. Analysts note that fiscal stimulus in Japan tends to boost stocks, but has limited impact on Japanese government bond yields, thanks to the BoJ’s yield curve control policy. Analysts say stronger Japanese stocks increase hedging requirements, spurring exits (and selling of the JPY).

Elsewhere, risk appetite is strong, with US equities back near record highs, undermining demand for the safe-haven yen. More generally, the main driver for the pair is likely to remain the US-Japan interest rate differentials. In a note published earlier in the week, Danske Bank said they “continue to expect two rate hikes from the Fed in 2022 (September and December), but they also see upside risks to this forecast, with potentially earlier and larger rate hikes. of which we forecast “. for 2022 and 2023 “. As a result, we think “10-year US Treasury yields will hit 2% over the next 6-12 months.”

Technical levels