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Summary: The "Super Central Bank Week" has come to an end, with central banks led by the Federal Reserve initiating a "strategic ambiguity" trend, prompting the European Central Bank and the Bank of Japan to follow suit. The policy adjustments by the Bank of Japan may face unexpected outcomes.

Fundamentals

In the past week, the USDJPY exchange rate experienced significant fluctuations, with swings of 100, 200, and even 300 points. Not only did the yen react strongly to the meetings of the Federal Reserve and the European Central Bank, but the Bank of Japan also surprised the market. The sharp volatility in the yen during Thursday's closing session was triggered by a report from Nikkei, stating that the BOJ is expected to maintain the bond yield curve in a fixed range while easing control over it.

The outcome of the regulatory agency meeting confirmed the information from Nikkei. As expected, last Friday, the Bank of Japan kept its key interest rate at a record low of -0.1%. However, the new BOJ Governor, Kazuo Ueda, made a bold and revolutionary decision to change the strict target for the yield curve to a more flexible one. This is a common practice for some central banks but an extremely daring step for the Bank of Japan.

The target yield level for Japan's 10-year bonds remains at 0%, and the permitted range of yield curve changes is still +/-0.5%. However, from now on, this limit should no longer be seen as a hard boundary but rather more flexible. Certainly, the BOJ drew a "red line" at the 1.0% level within certain limits and pledged to conduct daily purchases to ensure that yields do not rise above this level.

Initially, this decision indeed shocked the market, and the yen surged instantly. Swings of 100, 200, and even 300 points followed. The USDJPY eventually halted its decline at 138.06. However, in subsequent trading, everything seemed to return to our established volatility trend. We believe that fundamentally, the BOJ policy remains vague. Currently, the adjustment of the long-term bond yield target range is merely symbolic, and whether it will actually be adopted is still uncertain. The hasty measures taken by the BOJ, given the potential growth of inflation and high levels of public debt, are seen as overly audacious and exacerbate concerns that stopping control over the yield curve might be unwelcome or unrealistic. Because even though the yen may currently benefit from the possibility of a slight rise in long-term rates, it would be a disastrous signal for the currency.

Looking at the BOJ meeting, it is not expected that any important economic information related to the country's economy will emerge in the coming week. At the time of writing this commentary, one-third of neutral analysts predict that the currency pair will continue to rise in the coming days, one-third expect it to fall, and one-third adopt a wait-and-see stance.

Overall, it remains unclear what will happen in the future and how it will unfold. Therefore, last weekend ended favorably for the U.S. dollar. The USDJPY exchange rate may see alternating upward movements in the near future.

Technical Analysis

On Monday, during the Asian and European sessions, the USDJPY continued the significant fluctuations seen over the weekend. As the New York session begins, the market is likely to experience even more volatility. Contrary to the strong upward trend, the market might face an equally high downward pattern. The bulls have already achieved their expected rebound (limit) target of 142.50 in the 4-hour chart.

Simultaneously, a major bearish trendline has formed in the same chart, with resistance near 142.50. However, any further upward movement could push the currency pair to the level of 143.20. Nevertheless, we believe that such an outcome is unlikely and that the rebound is nearing its end.

On the downside, the currency pair may find buying interest around the 142.25 level. However, it may face resistance around the 61.8% Fibonacci retracement level of 151.94-127.21, leading to further weakness towards the next major support level around 140.00. A break below this support level could drive it towards the range of 139.50. Eventually, it may return to the initial uptrend point near 138.70. In terms of trading strategy, it is recommended to focus on going short at highs.

Trading Recommendations

Trading Direction: Short

Entry Price: 142.20

Target Price: 138.70

Stop Loss: 146.00

Valid Until: 2023-08-14 23:55:00

Support: 141.97, 140.98, 139.73

Resistance: 142.53, 143.20, 145.07