Thursday, March 22, 2018
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USD/JPY – Downside bias strengthens ahead of Powell Round 2
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  • Implied vol premium of JPY calls is on the rise
  • Powell appears before the Senate later today, could reinforce expectations of four rate hikes this year.

The USD/JPY pair has recovered 20 pips from the session low of 106.54, however, the relief could be short-lived as suggested by the pick up in demand for JPY calls (bullish bets).

The USD/JPY weekly 25 delta risk reversals are being paid at 1.475 JPY calls vs. 0.725 JPY calls on Feb. 21. The rise in the implied volatility premium of JPY calls suggests investors are expecting further downside in the USD/JPY pair.

Further, two-week risk reversals and one-month 25 delta risk reversals show investors are hedging (buying bullish Yen bets – JPY calls) against a deeper drop in the pair.

Also, Powell will likely reiterate his strong views on the US economy during his appearance before the Senate, forcing markets to price in the possibility of four hikes in 2018, thus leading to another round of sell-off in risky assets and an uptick in safe havens like Yen.

USD/JPY Technical Levels

Chief Analyst at details the technical set up as follows-

“From a technical point of view and according to the 4 hours chart, further losses are likely for the pair, as it’s developing below the 50% retracement of its latest bullish run, also retreating further from a bearish 100 SMA, while technical indicators entered negative territory. The immediate support is now 106.54 the low set last week and the 61.8% retracement of the same run, with a break below the level opening doors for an extension toward the yearly low of 105.54 posted mid-February.”

Support levels: 106.55 106.20 105.80

Resistance levels: 107.00 107.30 107.35

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