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Summary: Japanese consumer prices accelerated in April, with CPI accelerating from 3.2% to 3.5%. Core CPI rose from 3.1% to 3.4%. The indicator has been above the Bank of Japan's 2% target for 13 consecutive months, indicating continued inflationary pressures. Despite these inflationary pressures, there are no clear signs that the BOJ is ready to exit its ultra-easy monetary policy.

Fundamentals

Inflation in Japan continued to rise, with core inflation climbing to 3.4% year-on-year in April, up from 3.1% in March and in line with market expectations. This indicator excludes fresh food but includes energy items. The index excluding food and energy, closely watched by the Bank of Japan, rose 4.1% year-on-year in April, the highest level since September 1981.

The rise in inflation, coupled with a surprising rise in GDP in the first quarter, has sparked speculation that the BOJ may begin to phase out the ultra-loose policy the central bank has implemented for decades.

As we all know and have reiterated, the BOJ insists that the current high inflation rate is cost-driven and expects inflation to start falling around September/October this year.

The new governor, Kazuo Ueta, has said that he would not change policy until inflation was sustainably around 2% and wage growth strengthened. Core inflation has been above the Bank's 2% target for more than a year, and markets are watching every comment from the BOJ for any sign of a policy shift.

Speculators have long seemed to be playing a cat-and-mouse game with the BOJ, betting that new Governor Kazuo Ueda will move to tighten policy, which will push the yen higher. With the yen falling below 138.00 and the important psychological barrier of 140.00 looming, the possibility increases that the government will intervene in the currency markets to stabilize the yen and fire a salvo at speculators.

Currently, the plight of the yen continues, plunging 470 points on Thursday to hit a six-month low. Meanwhile, the U.S. dollar rose to 138.75 against the yen, up 0.61% on the day. The pair has not touched such high levels since November 2022. Admittedly, the sharp rise in USDJPY also signaled the end of a six-day rally, as the yen is in positive territory.

Moreover, the correlation between USDJPY and the Nikkei 225 may strengthen. Since April, foreign investors have increased significantly in the Japanese stock market, causing Japanese stock indices to outperform global stock indices.

Since April, the yen has become the weakest underlying among major currencies, suggesting that overseas investors may be hedging their foreign exchange risk while investing in Japanese equities. Given the historically weak fundamentals faced by the yen, the dynamic of "the more the Nikkei rises, the weaker the yen" could be strengthened if foreign investors hedge their investments in Japanese stocks with foreign exchange.

Technical Analysis

USDJPY has risen sharply this week, continuing its upward movement after breaking through key resistance of 137.50-138.00. Meanwhile, as mentioned earlier, the yen is in a positive trend after the sharp price rise, which means that the USDJPY will be in a correction in the near term.

Technical graphs suggest that while the USDJPY has further upside with the RSI and MACD tilted upwards in bullish territory, the stochastic oscillator is already in overbought territory. Therefore, continued bearishness may face short-term downside risks.

For now, with price trading limited below yesterday's high of 138.75, it may not be able to stand firm above that level given the approaching weekly close, while the next major resistance at 139.00 is unlikely to be threatened.

We believe that the price will return to the 136.20 range in the short term.

On the downside, a break below the 20-day SMA and trendline support at 135.00 could push prices lower to an extension in the 133.80-133.00 area. This is where the 50-day and 200-day SMAs and the 23.6% Fibonacci retracement are located. Failure to rebound here could trigger a new bearish correction towards the 2023 uptrend line of around 131.80.

Looking ahead, the next resistance level above 139.00 is 139.60. As long as the pair stays above 136.20, its strength is intact. It is recommended to go short at highs based on the correction.  

Trading Recommendations

Trading Direction: Short

Entry Price: 138.50

Target Price: 135.50

Stop Loss: 140.90

Valid Until: 2022-06-02 23:55:00

Support: 137.66, 136.33, 135.64

Resistance: 139.00, 139.60, 139.88