Chapter 25 06/14 USDJPY: Continued Easing Policy Could Continue to Push Down the JPY
Abstract: The Bank of Japan (BOJ) is worried that the global economic slowdown will cause collateral damage to Japan's export-oriented economy. Therefore, the BOJ made it clear that it will not tighten its policy until it is convinced that inflation will remain above 2%. This move may continue to push down the JPY.
Fundamentals
Since the beginning of this year, due to the stabilization of inflation, corporate governance reform, and the inflow of foreign investment with Buffett's support, the Japanese stock market has soared. These factors further complement the advantages of the BOJ's loose monetary policy and the benefits brought by the weakening JPY to Japanese exporters. However, against the background of geopolitical tensions and external risks such as possible recession in the U.S., some observers warned of technical signs of overheating.
On the economic front, although Japan's inflation rate is still much higher than 3%, the increase in wages still lacks the strength needed to prevent the decline in the real consumption power of families. BOJ Governor Kazuo Ueda warned that moving too fast would bring greater risks to stabilizing inflation than lagging behind.
Since the pressure of global peers to tighten policies still depends on data, the BOJ Governor may be able to wait in the short term. The unexpected interest rate hikes by the Reserve Bank of Australia and the Bank of Canada indicate that the tightening cycle is not over yet.
The overnight index swap indicates that the Federal Reserve and the European Central Bank will raise interest rates once and twice respectively for the rest of this year. If the Fed unexpectedly raises interest rates today, the JPYUSD may fall sharply, but it is not enough to change Kazuo Ueda's policy stance.
The BOJ may keep its monetary policy unchanged this week, and the tactical weakening of the JPYUSD and other currencies may continue. When the possibility of economic recession decreases, the market should continue to be in the background of rising interest rates and positive risk sentiment in the U.S., which is a typical negative environment for the JPY.
While speculation heats up about potential currency market intervention and a change in BOJ policy in the near term, these concerns look overdone as this time the JPY's decline was much slower than a year ago as the BOJ more clearly tied its policy outlook to inflation data at its April meeting. The BOJ is expected to adjust yield curve controls in July while raising inflation expectations.
Technical Analysis
The USDJPY traded quietly in the short term, slightly higher than the level of 140.00 before the FOMC policy was announced. If the BOJ does nothing again, the JPY may have a slight negative reaction, because those who want to tighten monetary policy immediately will be disappointed.
The USDJPY rebounded again on the 20-day SMA on Tuesday, increasing the optimism that bulls may dominate in the short term.
Among them, the RSI is still hovering above the neutral threshold of 50, reflecting a positive willingness to rise. However, its downward trend has witnessed the continued caution of the market. In other signals, the MACD is still below the 0-axis, and the stochastic oscillator is not far from its overbought level of 80. The short-term decline triangle has failed to continue to rise after the break, which also raises some doubts, although the current price is slightly higher than it.
The bulls may wait to close above the May high of 140.90 to push the price to the resistance level of 142.15 since November 21. The dynamic bullish pullback may hit the resistance line of 143.00 since March. After breaking through the high level, the bulls may test the range of 144.50-145.00.
The downside is that if the price falls sharply below the 20-day SMA and the bottom of 138.75, bears may push the price to the 50-day SMA and support the trend line of 136.95. If the exchange rate continues to fall, the next trigger level may occur near the 200-day SMA of 135.00, and the uptrend line in 2023 may also attract special attention at 133.80.
Overall, the USDJPY is neutral in the near term. A break above 140.90 or a drop below 138.75 could provide the market with the next clear direction. It is recommended to buy the dips with the key support levels.
Trading Recommendations
Trading direction: Long
Entry price: 138.80
Target price: 142.48
Stop loss: 137.30
Deadline: 2022-06-28 23:55:00
Support: 139.01, 138.75, 138.42
Resistance: 140.30, 140.93, 141.11
