December 29, 2021 9:07:55

Policy divergence between major central banks has been a key FX theme of this year. It should also be one of the main drivers in 2022. We know the Fed has signalled three 0.25% rate hikes for next year to combat the inflation surge, after the world’s most powerful central bank tapers its bond buying program. In contrast, the BoJ is happy to remain behind the curve with Japanese CPI not expected to rise up to 1% until 2023.

On the back of this, JPY has been the worst performing major currency this year, down over 10% versus the greenback. Relatively kind risk sentiment, higher US rates and more recently, the energy shock have also hurt the yen. This environment should continue as the Fed embarks on rate lift-off and if stocks stay supported.

We note that the 10-year US Treasury yield has yet to break 1.5% and is some way off the cycle high near 1.7% from October. USD/JPY closely correlates with long US Treasury yields so it is worth watching to see if rates can push higher as a near-term catalyst.

USD/JPY bullish move in play

After printing multi-year highs at 115.52, prices plunged in late November with the biggest one-day fall since the peak of the pandemic. But the pair was well supported by the November low at 112.75 and has risen this month in a series of higher highs and higher lows.

The first objective for the bulls is a zone of resistance around 115.50. Above here sits a long-term downtrend above 117, and then the 118.61/66 highs of December 2016. Near-term support is 113.90 and the area around 113.