USD/JPY Forecast: 115.00 Likely As Reflation Trade Is Back On Investors' Radar

The near 90-degree rally in the USD/JPY continued on Wednesday with the pair rising to 113.26, tracking the rise in the government bond yields.

The 10-year Treasury yield rose to a 2-1/2 month high of 2.357%, as US tax cut announcements accentuated the impact of hawkish remarks by Yellen. Tax cuts are largely seen as being reflationary, and the timing can't get better than this for the USD bulls. This is because Chinese PPI ticked higher in August, triggering speculation that the summer lull is behind us.

Thus, the medium-term USD/JPY outlook remains constructive. Even if North Korea starts a war with the US, the Yen is unlikely to strengthen as it would no longer be a safe haven, given Japan's risks of suffering collateral damage during a potential US-North Korea military conflict.

US Q2 GDP a non-event

Today’s final US Q2 GDP is expected to be confirmed at 3%, with personal consumption set to remain at 3.3%, though there is a small probability that it could be revised lower given the June retail sales number was revised lower.

However, this is likely to be a non-event for the markets as investors have begun pricing-in the reflation story and increased odds of a December rate hike. As discussed yesterday, the markets are yet to price in the Fed's reverse QE and the fact that the central bank is less data dependent.

Thus, a correction in the USD/JPY on the back of potential downward revision of the GDP is likely to be short-lived.

Risk reversals indicate that the investors are getting increasingly nervous about the speed of the USD/JPY ascent and hence are hedging against a decline in the USD/JPY spot.

Technicals

Weekly chart

Observations

• Golden crossover [50-MA & 200-MA bullish cross] almost confirmed
• ATR (average true range] is rising — indicates strong buying pressure and reinforces the reversal from the low of 107.32
• RSI remains bullish above 50.00
• Money flow index also holds above 50.00

The spot looks set to take out the resistance at 114.49 [July high] and move higher to 115.00 levels. Only a weekly close below 111.75 [weekly 200-MA] would abort the bullish move.