Updated: Mar 28, 2021
Is the United States in a potential risk of interest rate rise?
The supplementary leverage ratio was relaxed during the pandemic, this allowed banks to "exclude treasuries and deposits from their reserve requirements." - CNBC
This means that there's a potential rise in interest rates as the banks may decide to sell some of their Treasury holdings to not maintain reserve requirements.
High interest rates are generally a bullish sign on the dollar, considering JPY has negative interest rates we could be in for a potential upside move.
Fundamental analysis overview - Bullish
Macro Currency Strength Meter - Bullish
GDP Growth Rate Differentials - Bullish
Import/ Export Analysis - Bullish
Interest Rate Differentials - Bullish
Stock Market analysis - Bullish
Hedge Fund Positioning - Bullish
Price (Technical Analysis) - Bullish (discretionary)
Overall, USD/JPY looks like a great bullish idea for the watchlist.
Macro Currency Strength Meter
Our first step is using the Macro Currency Strength meter to determine domestic economic growth and contraction/ potential impact on the dollar.
The dollar strength is still hovering a positive region, although falling however JPY has dipped back into the negative region.
This deviation is a potential bullish sign moving into the next few months.
If the trends continue it will be an interesting sign of buyers coming in.
GDP Growth Rate Differentials
The GDP growth rate differentials is another indicator we've taken a look at. These forecasts made by the IMF predict what the expected growth rates should be.
Using these growth rates we can work out in comparison if United States is growing faster or slower vs Japan and then score that accordingly in the system.
Here we can see that in the green differential line that it's positive in favour of United States meaning it's bullish and agrees with our existing outlook following the Currency Strength Meter.
Import/ Export Analysis
Following a similar trade analysis as last trade idea Exxon Mobil is one of United States largest oil companies. We've chosen this in the analysis as Japan is a huge importer of oil and US is a huge exporter.
Interestingly, there's not a great correlation with Exxon but it's slightly negative overall and the positive growth goes against our initial outlook as bullish.
Crude oil is the next step in the commodity analysis this had a much stronger negative correlation. You can see over the past 10 years as the price of oil goes down, USDJPY goes up and vice versa.
The correlation was at negative 70%.
Slightly negative growth in crude oil this month is potentially bullish signs for USDJPY which is great for the bullish idea we have from the currency strength meter.
Finally we included Toyota in the analysis. Cars are a big import/export in both countries for Japan and United States.
The car company has a huge 82% positive correlation which shows over the past 10 years in the graph above.
The strong growth in Toyota can be seen as an early signal of a huge upside move coming in for USDJPY as you can see in the past it has been a great predictor.
Stock Market Analysis
Finally the domestic stock market analysis shows very strong signs.
You can see that post pandemic there's been a huge rise in the stock market, maybe due to the Government stimulus going on.
Nonetheless, the stock market gains show that assets in America are more attractive, investors are buying the dollar to fight potential inflation.
This agrees with our outlook from the currency strength meter at the start.
If you're interested in learning this type of fundamental analysis breakdown for more currency pairs, watch our free taster class.
Interest Rate Differentials
The interest rate differentials are the final fundamental economic indicator we're using in the analysis.
We can see that the interest rate differentials are at a positive difference meaning the dollar is more attractive as a currency to invest in.
The Japanese Yen on the other hand is less attractive as a currency due to negative interest rates.
Overall, interest rates look great for our bullish outlook.
Hedge Fund Positioning
Finally, the sentiment of the market.
We want to make sure we're not trading against the market.
To do this we use the commitment of traders report analysis, what we have in the indicator at Logikfx is the net hedge fund open interest.
We can see in the green line as the the green line peaks above 0 hedge funds are buying USD more in comparison to JPY.
This is a bullish signal that we're not trading against the markets.
Price (Technical Analysis) - Bullish
Overall, we can see buyers coming in.
The past month has seen strong buying power with price growing consistently and sellers having no power.
What we can expect are potential pullbacks but a strong trend continuation.
Feel free to use any technical analysis you want at this point.
E.g. Bollinger bands would be useful to integrate here.
Trading in securities can lead to significant losses, that may exceed your initial investment. You should seek advice from a licensed professional to determine if trading is for you. Logik Fx Limited is not an investment advisor. Further, owners, employees, agents or representatives of Logik Fx Limited are not acting as investment advisors. All persons and entities (including their representatives, agents, and affiliates) contributing to the content on this website are not providing investment or legal advice. Nor are they making recommendations with respect to the advisability of investing in, purchasing or selling securities, nor are they rendering any advice on the basis of the specific investment situation of any particular person or entity.
All information on this website is strictly informational and is not to be construed as advocating, promoting or advertising registered or unregistered investments of any kind whatsoever. All of the information on this website is for educational purposes only and is not to be construed as investment or trading advice.