USD/JPY: stabilization likely in the near term

After breaking above a key uptrend line in August, the USD/JPY exchange rate retraced on August 16th and is currently trading near the August 2024 low of 141.68. In the short-term, the pair is likely to stabilize within this range given the return of the US-Japan 10-year Treasury yield spread to key levels (3.85%, in line with the April 2023 and August 2024 lows).

Commodity Futures Trading Commission (CFTC) data showed that the net speculative position in the Japanese yen turned net long for the first time since March 2021, suggesting that yen short-covering is largely complete. The potential stabilization of market sentiment could limit safe-haven inflows into the yen.

Nonetheless, the short-term rally could face a resistance test at the 146.26 level. Its daily Relative Strength Index (RSI) needs to rise back above its midline to provide stronger confirmation that buyers are in control. For now, the policy divergence between the Federal Reserve (Fed) and the Bank of Japan (BoJ) is likely to continue, with the market expecting the BoJ to raise rates further early next year.

USD/JPY Index chart:

Brent Crude: retesting key horizontal support levels

Brent crude oil prices have retreated to 2023 lows near $71.84, driven by a slowdown in China and weak economic conditions in the U.S. and Eurozone, as investors cast doubt on the outlook for oil market demand.

Despite the disruption of oil flows from Libya, ongoing tensions in the Middle East, and the possibility of OPEC+ delaying the easing of production cuts, the impact of these factors on prices is likely to be temporary.

While buyers may attempt to defend key support levels, it is still too early to tell if there is a broader reversal in prices. The daily RSI has failed to break above the midline in the first two retests and prices have shown a series of lows since September 2023. The latest CFTC data shows money managers have cut their net long crude oil futures and options positions to their lowest levels since February this year.

If prices fall below the $71.40 level, further downside to $65.87 (August and December 2021 lows) is possible. On the upside, resistance could lie at $75.22.

Brent Crude chart:

Japan 225 index: back to trendline support

The JPY 225 has experienced a sell-off of more than 10% since the beginning of the month and is now back down to rising trendline support near 35,200.

In the short term, risk sentiment is likely to stabilize, with the market remaining focused on the US Consumer Price Index (CPI) this week, given that the balance between inflation and growth risks has shifted significantly and a number of US growth data (PMI, employment report) have been released. However, barring any major surprises, the market's reaction to the inflation data is likely to be limited.

Even so, any rally in the Japan 225 could face a resistance test at 37,000, followed by the 200-day average (MA) at 37,700. Ahead of the upcoming Federal Open Market Committee (FOMC) meeting, market sentiment is expected to remain cautious and coupled with seasonal weakness, buying should remain short-term.

Japan 225 chart: