{x} | Trading.live

Abstract: USDJPY fell 5.4% last week from its June 30, 2023 high of 145.07, marking its worst one-week decline since November 7, 2022. For now, the sharp sell-off seems to have managed to hold at the 200-day SMA at 137.65. Short-term momentum has turned positive, which increases the likelihood of a corrective rally.

Fundamentals

Discussions surrounding the Bank of Japan's (BOJ) potential shift towards an extremely dovish monetary policy at the monetary policy decision meeting scheduled for July 28 have gained attention once again.

Local media outlet Yomiuri Shimbun reported that the BOJ may raise its annual inflation forecast for the fiscal year 2023 in the latest quarterly outlook report to above 2%, coinciding with the announcement of the monetary policy decision on July 28.

Former BOJ official Hideo Hayakawa stated that he expects the BOJ to further expand the yield curve control program on July 28, adopting a more aggressive approach by widening the range of the 10-year Japanese government bond yield within approximately 0% by 50 basis points. Government bond yields are projected to increase from the current 0.5% to 1%.

Previously, the BOJ surprised the market by expanding the range of the 10-year Japanese government bond yield by 25 basis points on December 20, 2022.

The upcoming BOJ monetary policy meeting later this month, where adjustments to the yield curve control are anticipated, may reflect headwinds for the recent upward trend in the Japanese stock market. The YCC adjustment is expected to weigh further on stock prices after the recent rally. However, the banking sector may be an exception as it stands to benefit from the YCC adjustment, and any downturn could be relatively short-lived.

Meanwhile, a stronger yen and higher domestic interest rates will negatively impact overall corporate earnings, coinciding with the yen's two-week rally. Admittedly, hedge fund bearish yen sentiment is also the strongest in more than a year.

Meanwhile, the strengthening Japanese yen and rising domestic interest rates are expected to have a negative impact on overall corporate profits, coinciding with a two-week rebound in the yen. Hedge funds' bearish sentiment towards the yen is currently at its strongest in over a year.

According to the data from the Commodity Futures Trading Commission as of the week ending on July 11, leveraged funds increased their net short yen positions by 3,582 contracts, reaching 58,099 contracts, the highest level since May last year. Previously, speculation unwound carry trades as U.S. inflation cooled faster than expected, leading to a yen appreciation of approximately 4% against the U.S. dollar.

Technical Analysis

USDJPY's sharp decline since June 30, 2023 has tested the 200-day SMA, which converges with the support level at 137.65 (previous swing highs on December 15, 2022, March 8, 2023, and May 2, 2023).

Furthermore, today's price action has formed a bullish reversal pattern in the daily chart, indicating a positive trend. The deeply oversold condition in the daily chart and profit-taking after the substantial decline have contributed to a new strength.

Meanwhile, the 1-hour Relative Strength Index has signaled another bullish divergence in its oversold region and has witnessed a bullish breakout above the key parallel descending resistance at the 43 level. These observations indicate a weakening of the recent downward momentum.

The first resistance level on the upside is at 139.70, followed by the second resistance level at 140.10, which also represents the 38.2% Fibonacci retracement from the high on June 30, 2023, to the current downtrend. A breakthrough of the psychological level at 140.00 is needed to confirm the reversal signal in the daily chart.

On the other hand, further downside movement would exert pressure on new recovery attempts. A break below 137.40 would invalidate the corrective rebound and expose the next support level at 135.70.

Overall, after the significant decline last week, the downward momentum is diminishing, and a corrective rebound is forming. In terms of trading strategy, it's recommended to buy the dips.

Trading Recommendations

Trading Direction: Long

Entry Price: 139.10

Target Price: 141.42

Stop Loss: 136.30

Valid Until: 2023-07-31 23:55:00

Support: 137.08, 136.14, 135.78

Resistance: 139.71, 140.00, 141.10