Japanese Yen Technical Forecast: Neutral
- It’s a game of hints an innuendo around the Japanese Yen as market participants look for clues of any changes to the Bank of Japan’s uber-loose monetary policy.
- The BoJ avoided making any changes at this week’s rate decision but that didn’t stop Yen-bulls from fading the move while pushing price back-below the 130 level. But a comment from BoJ Governor Kuroda later in the week seemed to help Yen-bears get better footing, leading to a net gain on the week for the USD/JPY pair. Kuroda opined that he thinks inflation is already near its peak and that it would be below 2% by the end of the year. This was a shot-in-the-arm for themes of Yen-weakness.
- 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.
The trend in USD/JPY has put in a very clear turn over the past three months.
While USD/JPY strength ruled the day from the 2021 open into last Q4’s open, an aggressive turn began to show in the middle of October as markets started to gear up for a couple of different items of change, both of which impact the USD/JPY pair. The first and most obvious is US rates: US rates were running-higher for much of this period as the Fed was hiking rates in effort of stemming inflation. And now that there’s some signs that inflation is coming down, markets are responding by pushing US rates lower, as well. So while this was a massive bullish factor in the USD/JPY trend through 2021 and 2022, it’s been going the other way of recent.
The other and perhaps more subjective is expectation around the Bank of Japan. While US rates were running higher on the back of rate hikes from the Fed, the Bank of Japan remained very loose and passive, even as Japanese inflation was beginning to rise. Nonetheless, through much of last year, the BoJ stuck to a loose and passive message that kept Yen-weakness as a dominant theme, perhaps even more so than the USD strength that was happening alongside that theme. With Japanese rates remaining so low while most other economies lifted rates, this drove capital flows via the carry trade as investors could borrow in cheap Yen and invest in higher-yielding markets elsewhere.
And carry trades can build: Because while the rate dichotomy provides motive for trend, it’s the price appreciation that really grabs investors’ attention and this leads to more and more bulls jumping into the trend to capture that new higher rate of return.
The downside of the carry trade is that it can be vulnerable to overcrowding, and this seemed to happen at various points throughout last year. And as we all know from sentiment, a solid fundamental background or technical setup is not enough to drive a price trend on its own, as supply/demand dictates that buyers or sellers voicing their opinions is what can create actual price moves.
And if anyone that does want to be long of a market already is, well it doesn’t matter how great the fundamental picture is, if there’s no additional demand then prices will accordingly move-lower.
It’s when those folks that are holding long and have been holding long all of the sudden get a reason to sell that the trend can start to go the other way, and that’s what’s been stacking up over the past three months in USD/JPY.
USD/JPY Weekly Price Chart: 21 Months of Gain, 3 Months of Pain
Motive for Pullback, but Reason for Reversal?
Last week saw a few items pop up that could support a countertrend move in the recent sell-off. The widely awaited Bank of Japan meeting brought no changes or announcements to speak of and then later in the week, BoJ Governor Kuroda made some supportive comments about retaining that uber-dovish outlay that the BoJ has had. He in essence said that he expects inflation to continue to fall on its own and that the BoJ may not need to make any major changes to policy in the near-term.
The other item of interest is the US Dollar itself, which has been in an aggressive sell-off to run alongside this more recent theme of Yen-strength.
In USD/JPY, support played-in from a key spot on the chart last week at 127.27, which is the 50% marker of the 2021-2022 major move in the pair. This came into play on Monday, just before the BoJ rate decision, and the lack of any new information from the Bank of Japan helped to bring a strong bounce in the pair up to the familiar resistance from prior support level at 131.25.
That move was quickly faded, however, but sellers were unable to re-test the low at Fibonacci support, and the remainder of the week saw a cautious bounce continuing to hold with a quick push on the heels of those Kuroda comments denoting continued passiveness from the BoJ, at least in the immediate future.
At this point, USD/JPY is testing the 130.00 level for resistance. There could be scope for a deeper resistance test, around the 131.25 level or perhaps a little higher, around the 133 level which is the 38.2% retracement of the same study that produced the low at the 50% mark.
The 20-day moving average appears pertinent here as there hasn’t been a daily close above this level since the trend had started to turn back in October. This came into play as resistance last week, confluent with 131.25 as sellers swatted the move back-down. A sustained break above the 20 day moving average indicates a possible trend change and at that point, bearish continuation strategies could come into question.
USD/JPY Daily Price Chart