USD/JPY Hesitant to Embrace the Upside

A sharp rally in stock markets and heavy selling in bonds only led to minor USD/JPY buying in yet-another sign of indecision in the pair. Overall, FX moves were light in US trading as the kiwi led the way on the day while JPY lagged. The RBA decision is up next. Ashraf's Premium Insights identified a rare Head-&-Shoulder formation, backed by supporting fundamentals, leading to a new Premium trade.

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The US September ISM non-manufacturing index was the economic data highlight of the day and it flashed mixed signals. The overall reading of 56.9 was worse than the 57.5 expected and 59.0 prior but the internals raise other questions. New orders were weak, falling to 56.7 from 63.4 in a sign that businesses remain reluctant to invest, posting the biggest decline since 2008.  More surprising was employment, which rose to 58.3 from 56.0 and flouted Friday's soft nonfarm payrolls report.

Overall, evidence continues to show the US economy slogging along in the 2.0% to 2.5% but it's been stuck in for the past five years. Hopes for an acceleration or wage gains will slowly fade as the effects of hawkish Fed talk, a strong US dollar and slower global growth weigh.

That helps to explain why USD/JPY has been reluctant to rally. It remains near the midpoint of its 6-week range despite talk the BoJ is edging closer to easing. Ultimately, that range may be the most-important chart in FX and when it breaks, it will reignite high volatility in currency market. Unless the US 10-year yield recovers and closes the week above the 200-DMA of 2.12%, USDJPY is unlikely to move beyond 121.00. The BoJ meets on Wednesday and is unlikely to raise QE due to the already notable developments in wages, corporate profits and the cheaper yen. There is, however, chatter of action at the next meeting, once the international focus of G20 meetings is behind us. A rate cut or a higher QE could be in the works if USDJPY drops below 118.00 by then. 

The spot to look for volatility in the short term is the Australian dollar. The RBA decision is at 0330 GMT but first the August trade balance report is due at 0030 GMT. The consensus is for a 2.4B deficit, which would be the best reading since March but still a headwind for Australian growth.

The RBA isn't at all expected to move from its 2.00% rate but Stevens could signal action later in the year. We're also curious to hear any comments about the Chinese economy.