Daily brief: USD/JPY biased to downside as Japan FX reserves remain plentiful

Tuesday’s Asia-Pacific outlook

A positive Wall Street session and a weaker US dollar may boost Asia-Pacific markets today.

The Dow Jones Industrial Average rose 1.31%, while the high-beta Nasdaq-100 gained 1.11%. The US midterm election has traders in a rosy mood, given historically positive returns in the months following US voting. Republicans are favored to gain seats, especially in the House.

China and its increasing Covid cases may pose a headwind to markets after policymakers push back against rumors that the country may ease its Covid policies, which are among the strictest in the world. The lockdown effects were seen in the October trade balance, released yesterday, which showed a surprise drop in exports and imports. WTI Crude prices fell 0.89% on Monday.

Australia’s Westpac consumer confidence Index for November crossed the wires at 78 this morning. That was down from 83.7 in October. A pullback in the Reserve Bank of Australia’s pace of tightening hasn't provided relief for mortgage rates, and other debt like credit cards remains elevated, squeezing consumers' pocketbooks.

Japan’s foreign exchange reserves fell to $1.19 trillion in October from $1.24 trillion in September, according to the Ministry of Finance (MoF). Around a tenth of those reserves are readily available for currency intervention, being held in foreign banks; other reserves are less liquid. The value of those foreign reserves fell to $941 billion from $985 billion.

A period of yen strength followed the last likely intervention on October 21, when USD/JPY (大口） traded above the 150 mark. That has kept yen bears on the sidelines, but the JPY strength may not last if the US dollar undergoes another bout of strength, especially with the Bank of Japan keeping its ultra-loose policy in place. But for now, Japan still has plenty of ammunition to defend the currency.

Japanese yen technical outlook

USD/JPY (大口） is trading within a Descending Triangle pattern, putting a bearish tilt on the technical outlook. The pattern’s measured move would see a target around the 100-day Simple Moving Average (SMA). A break below support is required before confirming any breakout, while rising above resistance would invalidate the pattern.

USD/JPY daily chart

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