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Summary: The JPYUSD fell below 143.00 on Friday, marking a decline of nearly 1% from the previous trading day. The yen also dropped to record levels against the Swiss franc and reached its lowest level against the euro since 2008. With the persistent weakness of the yen, market attention has turned to verbal intervention by the Bank of Japan, which could potentially drive an increase in safe-haven assets.

Fundamentals

U.S. Treasury yields surged on Thursday after major global central banks warned of possible further rate hikes, the latest catalyst for yen weakness. Fed Chairman Jerome Powell said the U.S. may need to raise interest rates once or twice more this year, while the Bank of England warned that it may have to raise rates again after a 50 basis point hike.

The Bank of Japan left its policy unchanged at last week's meeting and had no plans to tighten policy rates in the near term. This puts the BOJ at odds with other major central banks, which have been tightening rates sharply to curb inflation.

With major central banks likely to raise interest rates further while the Bank stays put, the widening spread between U.S. and Japanese bond yields has led to a sharp weakening of the yen, raising concerns that the government may intervene in currency markets to support the yen.

The Japanese Ministry of Finance shocked global financial markets with its interventions in September and October of last year. Although the yen has not fallen to the level seen back then when it dropped below 150.00, a breach of the 145.00 level could prompt further verbal intervention by Japanese authorities.

Verbal intervention effectively amounts to the BOJ and the Ministry of Finance warning yen bears that FX intervention may be near. Alternatively, the BOJ could adjust its yield curve control policy, although this possibility seems less likely at present.

So far, market expectations that any verbal intervention will trigger sharp fluctuations in the yen seem to be lukewarm. The one-month implied volatility in the currency market is lower than it was before the actual intervention last year.

Investor end-of-season buying and corporate hedging flows have also led to a decline in the yen, with the market now anticipating limited resistance for the USD/JPY exchange rate to rise to 145.00.

Gold prices continue to face selling pressure around $1,917 in the European session. However, as the market focuses on the Bank of Japan's verbal intervention, a "sector rotation" effect in the forex market may aid in the rise of safe-haven assets.

Technical Analysis

On Friday, gold prices continued to follow a key bearish trend line in the hourly chart with resistance near $1,930. Earlier, gold prices tested support levels at the recent low of $1,910 and prices are currently consolidating losses.

Judging by the rapid decline in the market and the pace at which prices are likely to continue to get consolidated, the next target for the bulls may be to reach a return to the mean in the $1,930 range. If the bulls manage to hold this level, a return to the $1,934-$1,938 range is possible, and any further gains could set the foundation for a rise towards the $1,955 level.

On the other hand, initial support for further downside movement is near $1,900, with major support around $1,885. If the support at $1,885 is breached, the price may accelerate its decline, potentially reaching the $1,860 range.

Overall, despite the fundamental conditions favoring further downward movement after consecutive new lows in gold prices, the "sector rotation" effect in the market and mean reversion may contribute to a potential rise in gold prices. Nevertheless, instead of buying, it is advisable to wait for the upward slope propelled by mean reversion. This approach offers the least risk. In terms of strategy, it is advisable not to chase long positions but focus on going short at highs.

Trading Recommendations

Trading Direction: Short

Entry Price: 1927

Target Price: 1860

Stop Loss: 1964

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

Support: 1900, 1890, 1885

Resistance: 1927, 1934, 1945