Chapter 3  06/29 USDJPY: Market Focused on Psychological Level, Cautions of Cascade Events

Summary: Overnight, the USDJPY surged to a level unseen since November last year, reaching around 144.00. This recent weakness in the yen has become the focal point of the market's attention in the latest trend since April this year. Prior to this, the market's consensus was that "betting on the Bank of Japan's continued accommodative policy would not end."


Before the New York session on Thursday, the USDJPY reached a new high since November 10 last year (144.86), approaching the significant psychological level of 145.00.

Given that the yen is now approaching levels that prompted intervention by the Bank of Japan in the past, an increasingly prominent question is when authorities will take measures to prevent yen depreciation. Technically, it is essentially the Ministry of Finance that intervenes to support the currency, but it is done by instructing the Bank of Japan to take action. So, when will the Bank take action?

The key issue that Japanese authorities face is supporting the economy with ultra-low interest rates, while a weakening currency may exacerbate inflationary pressures. Japan is facing a problem that has not been dealt with for a long time, and it may take a long time for authorities to adapt to the new reality.

As Japan intensifies its implementation of ultra-low interest rates and other central banks continue to raise rates, the downward pressure on the yen continues to increase. Carry trades are rampant as speculators sell the yen to take advantage of interest rate differentials and buy other currencies.

However, the most effective and sustainable solution to the yen depreciation issue is to abandon the ultra-low interest rate policy. However, Japanese authorities do not seem to be close to doing so. This is what the market is betting on, driving the USDJPY higher to profit.

When the USDJPY last rose to the 145.00 level, Japanese officials attempted to "push down" the exchange rate, stating that they were "closely watching" the situation. But before taking actual action, the currency was allowed to rise above the 150.00 level; subsequently, the Bank of Japan, on behalf of the Ministry of Finance, intervened by purchasing a relatively small amount of currency. This measure helped alleviate the yen's free fall.

Subsequently, the Bank of Japan unexpectedly expanded the range of its Yield Curve Control (YCC), and that's when the turnaround occurred. The BOJ presented this move as "policy-neutral" as it expanded the positive and negative ranges. However, since all the pressure was coming from the upside, it was actually a tightening move. This was also seen as the first step in moving away from the loose YCC mechanism. The next step would then shift towards tightening, either through interest rate hikes or a slowdown in bond purchases.

The issue now is that the expansion of YCC has already taken place. Therefore, the BOJ has no tools available. It is speculated that it might expand the range again, but the effect may not be as pronounced, as speculators may not believe it to be a credible tightening move.

Another option is a joint intervention by the Fed and the Bank of Japan, hinted at by Japanese authorities when discussing "coordination". Kazuo Ueda and his colleagues seem inclined to tighten policy, just not at the moment. The Bank of Japan's stance might be an attempt to maintain the status quo until the next GDP data is released to see if there is genuine economic growth emerging. Ultimately, the focus of the accommodative policy is achieving "organic" inflation, not inflation caused by currency weakness leading to increased import costs. The question is whether the market will force the Bank of Japan to take action earlier.

06/29 USDJPY: Market Focused on Psychological Level, Cautions of Cascade Events-Pic no.1

echnical Analysis

After closing above the seven-month high at 144.00 on Wednesday, the USDJPY continues to accelerate upwards along moving averages and is now approaching the psychological level of 145.00.

The momentum indicator suggests some congestion in the upward path as the price continues to trade in the overbought territory. At the same time, an extension of the resistance line from March is located in the same area. Therefore, a decisive upward movement is expected to boost bullish confidence, pushing the price toward the 148.80 level. Unless the bulls are prevented from further advancement at the 146.60 level, the upward trend is expected to continue.

On the other hand, a downside reversal could first retest the nearby support level at 143.30 before entering the 142.00 resistance area. Further downside movement could temporarily stall around 140.90, and breaking below that level could result in a significant drop toward the 139.00-138.11 range.

Overall, the USDJPY is strengthening its bullish structure, and with the price nearing a cautious range, bulls are expected to slow down in the short term. In terms of trading strategy, buying the dips is favored.

Trading Recommendations

Trading Direction: Long

Entry Price: 144.40

Target Price: 146.60

Stop Loss: 142.20

Valid Until: 2023-07-13 23:55:00

Support: 144.13, 143.86, 143.27

Resistance: 145.00, 145.39, 146.60

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