USD/JPY: better bid and about to get bidder for the 120's?

USD/JPY has been a strong bid in risk-on markets while investors are backing the greenback as we head towards the end of the year and much uncertainty to come in 2017.

The greenback is in demand as the world's reserve currency while the Yen has been printed so much that it has diluted its safe-haven appeal given the weakness in the Japanese economy and divergence between the BoJ and Federal Reserve. Longer-term rate differentials (10Y spreads) continue to widen; the yield gap of over 230bps last week represented the biggest yield gap for the USD since 2010. Fed funds futures continued to imply a 100% chance of a rate hike on 14 December, and two more rate hikes priced in for 2017.

Fed preview: The second rate hike is coming - Commerzbank

Investors are placing their money where they are predicting a better return, and that is the greenback and US stocks while bonds plummet and global yields rise in the face of reflation.

Oil prices/demand and the Yen

Also, worth noting, is that Japan is the world's second largest net importer of fossil fuels and oil remains the largest source of primary energy consumption in Japan. The recent accord between non-OPEC members with OPEC members has seen a rally in oil prices at the start of this week that is not helpful to the ailing Japanese economy - a demand driven environment that this could well spark ahead of this week's FOMC when full markets get going could weigh on the Yen further.   

Brent oil clocks 16-month high on first global oil pact

USD/JPY levels

The market has penetrated through the 115.41 key fibo level and we are in the sixth weekly decline in the Yen and we have penetrated the 200 week sma at 108.92, marching on through Feb 2016 highs and that reveals the 120's and 2016 high of 121.68. 120.00/120.10 represents the 78.6% retracement of the move down from 2015. Break to the downside, on say the FOMC holding or a sell the fact on a hike could test the 114.80 level and 112.80 as the floor of the early Dec commencing channel support line.