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Summary: Bank of Japan Governor Kazuo Ueda has indicated that his role may become more challenging after the year-end, marking the first time in this cycle that such comments have been made by the BOJ chief. Previously, he had only alluded to the necessity and reasons for further easing. The likelihood of a stronger yen has increased due to these remarks, causing the yen to rise against all G10 currencies. The USDJPY pair briefly fell 1.8% to 144.54, erasing gains for the month.

Fundamentals

Earlier today, BOJ Governor Kazuo Ueda stated that the central bank would adopt a more stringent monetary policy, leading to a decline in Japanese government bonds.

Governor Ueda noted that once freed from negative short-term borrowing costs, there are multiple options for the interest rate target. However, he emphasized that no decision has been made on this shift yet. Ueda reiterated the BOJ's commitment to continue implementing accommodative monetary policies under yield curve control (YCC) to support economic activity and promote a wage growth cycle.

In his parliamentary speech, Ueda pointed out that the economy would continue its moderate recovery, but there is "extremely high" uncertainty in the outlook. He stressed, "We have not yet reached a situation in which we can achieve [our] price target sustainably and stably and with sufficient certainty."

Regarding the potential shift in the BOJ's monetary policy, Ueda suggested that once the central bank abandons the negative interest rate policy, it may consider various interest rate target options. These options include continuing to target the reserve deposit rate that financial institutions hold at the central bank or reverting to a policy focused on the overnight call rate. He clarified, "We have not made a decision yet on which interest rate to target once we end our negative interest rate policy."

Influenced by Ueda's remarks and increasing speculation that the BOJ may end the world's last negative interest rate policy sooner than expected, the USDJPY continued its decline, dropping 1.8% to around 144.54 intraday. This marked the largest single-day decline since January and touched the lowest level since September.

As expectations for earlier and more substantial rate cuts by the Fed heat up in the US interest rate markets, the USDJPY has begun to sharply weaken. This divergence reflects the demand for yen carry trades in a favorable risk market environment. If economic growth data indeed shows clear signs of softening, the market will likely pay closer attention to the possibility of a "hard landing," at which point yen carry trades may start unwinding along with an overall pullback in risk assets.

Technical Analysis

On Thursday, the USDJPY accelerated its decline, dropping 1.8% intraday, as the market anticipated a swift exit by the BOJ from its long-standing ultra-low monetary policy. This heightened expectation significantly boosted demand for the Japanese yen. On the other hand, speculation arose that the Fed may have completed its tightening policy, with market estimates suggesting a potential interest rate cut as early as March 2024.

The USDJPY breached the 38.2% Fibonacci retracement level of 137.23-151.90 after falling below 146.30, making the technical outlook in the daily chart more bearish. The moving averages are in a bearish formation, forming multiple bearish crossovers. Additionally, the relative strength index (RSI) has entered deep into the negative territory, confirming the recent bearish prospects.

Attention should be paid to the 50% Fibonacci retracement level at 144.57 within the range of 137.23-151.90; a break below this level could accelerate the downside momentum. Limited corrections may present better selling opportunities. A market correction to 146.30 will maintain the intact bearish outlook. Only prices above the 100-day SMA pose a threat to the bearish trend and mitigate downside risks. In terms of trading strategy, going short at highs is recommended.

Trading Recommendations

Trading Direction: Short

Entry Price: 146.30

Target Price: 141.30

Stop Loss: 147.50

Valid Until: 2023-12-21 23:55:00

Support: 145.00, 144.57, 144.00, 142.84

Resistance: 146.30, 147.00, 147.45, 148.44