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Abstract: The USDJPY rose for the second day in a row and hit a weekly high on Wednesday. The differences between the policy prospects of the Federal Reserve and the Bank of Japan (BOJ) continue to play a driving role and maintain support against the USDJPY. As the gap needs to be filled, the upside does not seem to be limited.

Fundamentals

The USDJPY gained some positive momentum for the second consecutive day and climbed to a new weekly high in trading on Wednesday. However, since the gap (comments made by Kazuo Ueda last weekend) needs to be filled before speculators make new directional bets, the upside seems to be smooth and helpless.

The remarks of Bank of Japan Governor Kazuo Ueda may not be a clear signal to cancel the negative interest rate policy at the end of the year, but if the meeting in September or October lacks a hawkish attitude, it may lead to the JPY falling again.

We believe that the BOJ will end the negative interest rate policy and yield curve control (YCC) before the middle of 2024, but considering the risk of rising inflation prospects in Japan, it is possible to end the negative interest rate policy ahead of schedule in the first quarter of next year. However, this is a "low probability scenario", depending on the level of the JPY and the data, and they think that the meeting in December is riskier than that in October.

In addition, they believe that if the BOJ decides to end the negative interest rate policy, the official will change the communication first, instead of just tentatively releasing the tone in an interview, and at least one meeting will be reserved for communication before adjusting the policy.

Another reason why we are suspicious of Kazuo Ueda's suggestion to adjust the policy in advance is that the BOJ still has sufficient reasons to continue to implement the stimulus policy. The GDP data in the second quarter shows that domestic demand has declined, and although wage growth has made some progress, the pace is still unstable.

On a larger scale, the painful experience of the BOJ's failure to withdraw from unconventional policies shows that the BOJ will be extremely cautious when it finally makes a policy shift. We believe that even if policymakers confirm that the price and wage data have made substantial progress, it will take some time for the BOJ to be sure that it can make a safe turn. Our benchmark scenario is that the BOJ will cancel the "yield curve control" and negative interest rate policy in the second half of 2024, and adopt a more lasting framework that can be maintained for a longer period. However, we also recognize that the upward risk of inflation and the further decline of the JPY may prompt an earlier policy shift.

Technical Analysis

Since mid-January this year, due to the increasing bullish pressure, the further rise of the USDJPY seems to be testing the nerves of the Japanese Ministry of Finance. After many verbal interventions, the USDJPY continued to be bought on dips.

Momentum indicators are mixed. Specifically, the Average Directional Index (ADX) suggests a very mild and weak bullish trend. More importantly, the Stochastic Oscillator continues to hover in the overbought zone but appears poised to move lower.

If the stochastic indicator falls sharply below the oversold level, creating a good gap with the SMAs, the bears may try to retrace. And try to push the price below 145.88 and later to the September 7, 2022 high of 144.99 and the lower limit of the upper trend channel, respectively.

On the other hand, bulls may be keen to keep the USDJPY at current highs to continue to close the gap-fill after last weekend's verbal intervention by Kazuo Ueda. If the bulls can successfully close the gap (147.71), the upside momentum does not seem to be hindered much until the October 21, 2022 high of 151.94 is touched.

Overall, the USDJPY bulls are still under control, but stochastic indicators may provide necessary retracement space for bears to meet the balance between indicator algorithms. However, speculators seem to be eager to complete the replenishment process and are unwilling to give up their positions. Given the market factors, it is recommended to buy the dips.

Trading Recommendations

Trading direction: Long

Entry price: 146.81

Target price: 149.20

Stop loss: 145.30

Deadline: 2023-09-27 23:55:00

Support: 146.98, 146.56, 145.88

Resistance: 147.88, 148.20, 148.85