With Hurricane Irma set to wreck havoc on Southern states in the U.S., USD/JPY broke through 108. No U.S. economic reports were released on Friday but the greenback has been tracking 10 year Treasury yields which dropped to their lowest level in 10 months. At the start of the week we talked about how Harvey, North Korea and the debt ceiling would pose major threats to the greenback and while the buck traded lower, the White House and Congress actually reached a deal to extend the debt ceiling for 3 months and China is tightening the noose on North Korea. But investors are aware that NK tensions could return at any time, the debt ceiling will become an issue again at the end of the year and everyone is watching how badly Hurricane Irma affects Florida so they have sold dollars.
Economists and investors have also resigned themselves to expecting a month of weaker economic reports as they watch how quickly activity in these areas recover. These uncertainties make it difficult for the central bank to provide much guidance on the timing of rate rises after they make changes to the balance sheet later this month. For all of these reasons we expect the dollar to remain under pressure with USD/JPY eyeing a break of 107 and eventually a move below 106. Two very important economic reports – U.S. consumer prices and retail sales are scheduled for release in the week ahead and unfortunately we believe these reports will hurt more than help the U.S. dollar.
Technically, USDJPY closed near its 9 month low of Friday. This alone is a sign of weakness but USD/JPY also broke below its April swing low which puts the pair on track to drop towards 106.50-106.65 region, where we have the 200-week SMA and 38.2% Fib retracement of the 2011 to 2015 rally.
