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Summary: On Monday, the USDJPY built on last week's rally from the 133.50 area, gaining some follow-through momentum for the third day in a row. While the positive tone surrounding U.S. stock futures may provide some support for the pair, the yen's weakness may continue to be dragged down by the dovish outlook from the Bank of Japan.

Fundamentals

The yen was the worst performer of the U.S. dollar against a basket of currencies in April. The U.S. dollar surged to a high of 137.77 against the yen at the beginning of May due to the extremely dovish comments of the new Bank of Japan Governor Kazuo Ueda. However, the yen, as a safe-haven asset, has been supported by the U.S. banking crisis and the expiration of the U.S. debt ceiling, causing the currency to reverse to the downside.

As for Japanese banks, Ueda said on May 9 that "the impact of recent U.S. and European bank failures on Japan's financial system is likely limited," and that "Japan's financial institutions have sufficient capital buffers." Meanwhile, Finance Minister Shunichi Suzuki also expressed his assurance of the stability of the country's financial system.

The BOJ kept its benchmark interest rate at a record low of -0.1% last month and maintained the upper limit of its target range for 10-year bond yields at 0.5%. The BOJ said it will retrospectively evaluate its monetary policy over the past decade, aiming to publish the results within a year to a year and a half. This longer timeframe contrasts sharply with evaluations conducted within a few months in the past and has sparked speculation about when policy changes will arrive.

The long retrospective period of the monetary policy over the past decade by Ueda's predecessor implies that Ueda will continue along the path set by his predecessor, Haruhiko Kuroda, for some time. For a year and a half, the BOJ will not change the main framework of monetary easing. In the meantime, the BOJ can still respond to economic and price developments by adjusting its Yield Curve Control (YCC) policy.

On the market side, the U.S. dollar moved sharply higher against a basket of currencies on Friday, but its valuation did not. The fast-approaching U.S. debt ceiling impasse is an important factor driving up demand for the U.S. dollar, which could temporarily disrupt our outlook for further USD weakness. And a rally in the yen is just a matter of waiting for the Bank of Japan to act.

We believe that USDJPY could strengthen further, focusing on the March highs of around 137.90. But before that, the bulls still need to give up more of the current gains, allowing the price to retreat to around 135.50, and then continue to strengthen. Overbought conditions may cause it to consolidate for some time. Given the increased volatility, we have adjusted the strong support level from 136.00 to 135.20. A break of the strong support level may indicate that 137.90 will not come into view for now.

Technical Analysis

Since mid-March, the USDJPY has been trading in an upward-sloping channel, with bulls continuing their upward movement after breaking above its 50, 89, and 100-day SMAs respectively. Although the pair experienced a correction after failing to extend its rally above the 200-day SMA, it has been steadily recovering lost ground over the past few sessions.

The current momentum indicators suggest that bullish forces are in control. Specifically, the %K line and %D line of the stochastic oscillator are alternating to the upside, while the RSI is opening up above its 50-neutral mark.

If buying pressure persists, initial resistance could be blocked at the 0.382 Fibonacci retracement level of the 2022 high at 151.94 to the 2023 low of 127.21. A break above that resistance could see the pair rise toward the July high of 139.38, with further gains likely to be halted at the 142.24 handle.

On the other hand, if the recent recovery fades, prices could reverse to the downside to challenge near-term support at 135.50, a level very close to the 50-day SMA. If that level collapses, bears could target 133.00 before attention turns to the April bottom of 130.62. If this fails to hold, the March low of 129.63 could provide downside protection.

Overall, USDJPY seems to be rebounding after a mild correction, with its rising channel pattern intact. However, bulls need to break the double top area of 137.90 to turn the medium-term outlook back to bullish. In terms of trading strategy, it's recommended to buy the dips.

Trading Recommendations

Trading Direction: Long

Entry Price: 135.50

Target Price: 139.50

Stop Loss: 132.00

Valid Until: 2022-05-29 23:55:00

Support: 135.48, 134.86, 133.57

Resistance: 136.62, 137.53, 138.15