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Summary: Some hedge funds have been unwinding bullish USDJPY positions, while others are buying USDJPY puts, anticipating a decline in the exchange rate. This shift comes as more observers believe the Bank of Japan is gradually nearing an exit from its controversial ultra-loose monetary policy. A Reuters survey indicates that over 80% of economists expect the Bank of Japan to end its negative interest rate policy next year.

Fundamentals

Bank of Japan (BOJ) Governor Kazuo Ueda faces the challenging task of guiding Japan out of a decade-long era of extreme monetary easing without causing market turmoil or stifling the fragile economic recovery.

In its October policy meeting, the BOJ once again adjusted its Yield Curve Control (YCC) policy, redefining 1.0% as a "ceiling" with some flexibility rather than a strict upper limit.

Insiders have previously indicated that following a gradual phasing out of YCC, the BOJ's next focus is ending its negative interest rate policy and raising short-term rates to zero.

The Reuters survey reveals that while none of the 26 economists predict any policy changes at the upcoming December meeting, many believe that the negative interest rate policy, setting short-term deposit rates at -0.1%, will come to an end next year.

In a survey conducted from November 15 to 20, 22 out of 26 economists, or 85%, expect the BOJ to end its negative interest rate policy next year. This proportion is up from 63% in October and 52% in September. The remaining 4 economists chose "2025 or later."

In this survey, 22 economists expect the end of the negative interest rate policy in 2024, with more than half, 12 individuals, believing it could happen at the April 25-26 meeting next year. 3 chose July, 2 selected June, and 1 opted for October. The remaining 4 institutions—Capital Economics, Daiwa Institute of Research, Mitsubishi UFJ Morgan Stanley Securities, and T&D Asset Management economists—suggest this could happen earlier in January next year.

Overall hedge fund option volumes for USDJPY remain low, with some funds exiting long positions last week, contributing to a significant recent drop in USDJPY. The puts they purchased are mainly for January 5 (when US non-farm payroll data will be released) and expire on January 22.

With the 20-year government bond auction taking place this Tuesday, the downward trend in Japan's long-term government bond yields may continue. As US bond investors reduce bearish bets, causing US bond yields to fall against the yen, Japanese investors may alter their initial plans and decide to cover their short positions in Japanese government bonds, potentially driving up USDJPY. Long-term Japanese government bonds may continue to strengthen after the 40-year bond sale following the BOJ’s December policy meeting. With few expecting policy changes next month, investors can consider establishing long positions during this period.

Technical Analysis

USDJPY surged after forming a reversal pattern in the daily chart, indicating a short-term reversal in the current trend, though momentum has yet to stabilize. Testing the previous low of 147.15 without breaking it will support further upside for the asset.

Despite a retracement in today's price surge, oscillators support this positive trend. The RSI is rising in the 30-level region, and the Stochastic Oscillator shows a bullish crossover between the K and D lines.

If bullish pressure persists, bulls may retest recent resistance levels at 149.85 and 150.20. Breaking through these levels could pave the way for a return to the rising trendline, possibly reaching a 13-month high of 151.92.

However, if the market continues to push prices lower, the initial downtrend may touch recent lows around 147.10. Breaking below this baseline could lead prices to decline toward the 145.80-144.40 level.

Overall, USDJPY appears to be stabilizing in the short term, and any break above short-term moving averages will confirm a restoration of the mid-term upward structure. In terms of trading, buying the dips remains the main strategy.

Trading Recommendations

Trading Direction: Long

Entry Price: 148.10

Target Price: 153.38

Stop Loss: 146.30

Valid Until: 2023-12-06 23:55:00

Support: 147.10, 146.59, 144.46

Resistance: 149.85, 151.92, 152.40