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Abstract: The Bank of Japan's (BOJ) unexpected relaxation of its yield curve control (YCC) is a "half-way" policy change attempt, which will only drag down the yen in the future.

Fundamentals

The BOJ unexpectedly adjusted its monetary policy last Friday. Although it did not cause many ripples in the global financial market, it injected more uncertainty into the trend of the JPY. One reason for the rapid stability of the market is that people may still expect the BOJ to only slowly change its ultra-loose monetary policy mechanism, and this prediction was supported last Friday.

On Wednesday, Deputy Governor Ichida said that the BOJ's more flexible 10-year bond yield threshold was only modified to maintain its ultra-loose monetary stance. Ichida added that the BOJ did not "consider withdrawing from monetary easing". These remarks are a repetition of the remarks made by BOJ Governor Kazuo Ueda last Friday, that is, the adjustment of YCC is not a step towards normalization.

Kazuo Ueda's remarks achieved the expected effect and boosted the JPY on Wednesday. But how long will it last? Investors simply don't believe that the BOJ will not change its policy, because the BOJ often says one thing and then does the opposite to catch the market off guard. This may give the BOJ a step ahead of speculators, but it will certainly not enhance the credibility of the BOJ. If the JPY falls again in the short term, it is the best example.

However, Japan's more flexible and unpredictable monetary policy will still bring great uncertainty to the global market. Although it is unlikely that the JPY will suddenly rise, the interest rate in Japan is still far lower than that in most other economies. However, if Japan's inflation rate remains uncomfortably high and interest rates in Japan and other countries begin to converge more, the JPY may eventually rebound.

Technical Analysis

The USDJPY is slightly lower today on comments from Deputy Governor Ichida, following the positive trend recorded since the last BOJ meeting. The USDJPY remains close to the midpoint of the uptrend channel that has been in place since the banking sector-induced adjustment in March 2023 and slightly below the 2023 highs, keeping recent talk of possible intervention alive.

At the same time, bulls are trying to set a series of higher highs and higher lows, and trying to re-establish control over the market. But at this stage, the momentum index is mixed. Since the USDJPY peaked on June 30, the Average Directional Index (ADX) has been in a state of sharp decline. It is now preparing to fall below the 25 level, which indicates that the market will be in a range trading state. On the other hand, the stochastic oscillator seems to support the upward momentum of the bulls. It has managed to bounce off the SMAs and is now continuing higher toward the overbought zone.

However, this all seems to be driven by the rise in the USD and not by the regenerative momentum of the JPY. (Looking at the consolidation of multiple directly-related currencies, the USDJPY has moved further upward at a lower height than other major currency pairs)

If the bulls are still determined to rebound again, they will try to push again above the peak of 145.07 reached on June 30. Then, they will have a chance to make a new 2023 high.

On the other hand, bears are consciously avoiding a return of the price to the recent highs. They seem willing to defend the October 21, 2022 trend line and gradually lead the USDJPY toward the busy 139.38-139.96 range. However, they must first break below the 50-day SMA at 141.17, otherwise, the downtrend will not hold.

Overall, the USDJPY bulls continue to regain control in a bullish trend. However, we should beware of bears' attacks. It is recommended to go short at the highs.

Trading Recommendations

Trading direction: Short

Entry price: 144.00

Target price: 140.19

Stop loss: 146.00

Deadline: 2023-08-16 23:55:00

Support: 142.25, 141.94, 141.35

Resistance: 143.55, 144.21, 145.07