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BoJ Tonight, USD/JPY Near Highs

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Japanese Yen Talking Points:

  • The Yen remains weak against most currencies with USD/JPY holding very near the 145 resistance that hasn’t yet given way.
  • Not to get lost in the shuffle but between the Fed’s rate decision later this afternoon and the Bank of England’s meeting tomorrow, we hear from the Bank of Japan. There’s little expectation for change at this point, as witnessed by that continued Yen-weakness; but might we start to see a semblance of change in the bank’s messaging after Core Inflation just printed at a 31-year high, with now five months of Core CPI above the BoJ’s 2% target?
  • With a built-in trend such as we have in the JPY, even the slightest hint in change of the underlying driver can compel a sizable move.
  • The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.

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The benefit of trend trading is often in margin of error. If a prevailing trend is going to lift in a singular direction, well that can afford a bit more sloppiness with entries, and it can also make the prospect of getting on the right side of a trade seem simpler, as there is a prevailing bias that one can latch on to.

For much of the past 18 months FX traders have had such a theme in the Japanese Yen. As rates have lifted across-the-globe, the Bank of Japan has been able to stay loose and passive while capping yields on 10 year Japanese Government Bonds at 0.25%. This policy has also come along with some considerable Yen-weakness and that dynamic has allowed for the Japanese currency to be a favorite for carry trades, where investors play themes off of growing rate divergence to put even more wind behind the sail of those JPY bearish trends.

Prolonged currency weakness can lead to inflation. Because while the value of the native currency is dropping, the value of other currencies, on a relative basis, is rising. And imported goods created in those other economies are more expensive, natively, which begins to push price pressures-higher.

In the United States, this dynamic was taking shape through last year. The Fed continually rebuffed this dynamic, instead saying that inflation as transitory and due to supply chain issues. That has since turned out to be a mistake. Europe is now trying to play catch up with inflation, as is the UK. In Japan, inflation has started to grow and earlier this week we saw Core Inflation print at a fresh 31-year high for Japan.

Japan Core Inflation

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Chart prepared by James Stanley

With inflation continuing to rise the big question is when the BoJ may signal some form of change on the horizon. And to be clear, this would be looking for a simple hint or indication that change may be afoot, not necessarily a full on policy change. As discussed by our own Zain Vawda yesterday, BoJ Governor Kuroda has already said ‘intervention is on the table and if needed it will be delivered swiftly and without warning.’

When trends get as built-in as this recent theme of Yen-weakness, sentiment gets incredibly one-sided. And the slightest hint that the factors pushing that trend might change can compel trend-riders to start to look at exits, which can then negate the trend which could compel even greater selling.

There’s been a couple of similar themes in USD/JPY already over the past few months – with prices stalling at 131.25 in late-April and again at the 140 psychological level in mid-July – which then led to an 900 pip pullback in a little over a couple of weeks. Again, nothing changed policy-wise during either of these runs but the simple hint that change may be afoot can create a large move in a very short period of time.

USD/JPY

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Chart prepared by James Stanley; USD/JPY on Tradingview

USD/JPY Techs

At this point the 145 psychological level is resistance. There have been two runs at that level that have both seen bulls re-buffed.

If that resistance can hold through the Fed today and the BoJ tonight – that will keep alive the potential for a double top formation, which is often tracked with the aim of bearish reversals. The neckline for that formation would plot around 141.50, which could project to a possible move, if the reversal does take-hold, down to around the 138.00 support area.

USD/JPY Four-Hour Chart

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Chart prepared by James Stanley; USD/JPY on Tradingview

— Written by James Stanley, Senior Strategist, DailyFX.com & Head of DailyFX Education

Contact and follow James on Twitter: @JStanleyFX



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