Chapter 62 10/31 USDJPY: Buy the Dips and Do Not Buy in the Uptrend
Abstract: Although the policy measures taken by the Bank of Japan (BOJ) today are significant, they are not enough. The three highlights of today's BOJ meeting were: the end of daily fixed-rate bond-buying operations, a sign that they are becoming futile in the face of surging global yields; the "use as a reference" of the 1.0% cap on 10-year Treasury Securities yields, which implies that the YCC no longer exists, and is a necessary precursor to ending negative interest rates; and an increase in inflation expectations for FY2024 from 1.9% to 2.8%, without which any expectation of an end to the YCC cannot become a reality. The increase in inflation expectations for FY2024 from 1.9% to 2.8%, without which any expectation of an end to the YCC would not be realized.
Fundamentals
At today's meeting, the BOJ kept interest rates unchanged as expected. Under the control framework of the yield curve, the BOJ keeps the short-term policy interest rate at -0.10% and the yield target of 10-year Japanese government bonds at around 0%.
These decisions were reached by consensus. However, the BOJ cleverly changed the wording of the upper limit of the yield of 10-year Japanese government bonds, and now calls the level of 1.0% "a reference for market operation". This move is seen as turning the upper limit into a flexible upper limit, rather than a strict limit.
In addition, the BOJ stated that "given the extremely high uncertainty of the economy and market, it is appropriate to increase the flexibility of yield curve control". This view has not been generally recognized, and Toyoaki Nakamura expressed opposition. He believed that increasing flexibility should be based on confirming the improvement of corporate profitability.
The BOJ also made a major update to the new economic forecast, showing an overall upward adjustment of the core inflation forecast, which significantly jumped from 1.9% to 2.8% in FY 2024.
Market observation: after the BOJ announced the policy, the JPY faced new downward pressure, because the expectation of major changes was basically not met. On the contrary, the BOJ slightly adjusted the wording of the yield ceiling, resulting in a dull market reaction.
The BOJ's policy decision today gives the impression that it is wary of the soaring yield of government bonds, which is why it is so cautious. However, the change in the inflation forecast is not enough to support his view of withdrawing from the YCC policy. The CPI excluding food (that is, the target of the BOJ) is still expected to be 1.7% in FY 2025, and will not exceed 2.0% steadily.
In addition, data released by the Japanese Ministry of Finance on Tuesday showed that Japan did not intervene in foreign exchange in October. Japan has never intervened in the foreign exchange market since last October. On October 3, the USDJPY broke through 150.00, and then sharply retreated, which triggered speculation on possible foreign exchange intervention. There were several similar rapid fluctuations in October, but the magnitude was small.
Overall, the BOJ's speech today has not reset the market's view of the JPY. The risk now is that the USDJPY will rise to 152.00 and prompt the authorities to take active foreign exchange intervention measures. At the same time, traders believe that the financial situation in the U.S. has not been substantially tightened, which is why the USD will continue to be supported.
Technical Analysis
The USDJPY rebounded strongly on Tuesday, with bulls back above the threshold of 150.00, fully recovering the losses of the past two days.
This suggests that the corrective decline was short-lived and left a bear trap below the 149.03 level, suggesting that the larger bulls were not undermined by yesterday's sharp decline as the threat of possible intervention faded.
Technicals in the 1D timeframe remain bullish, with repeated daily closes above the threshold of 150.00 set to confirm a new signal, as well as today's big bullish daily close (which is on track for the biggest daily gain since July 28).
However, in concrete terms, the 20-day SMA at 149.55 is the reasonable buying pivot; at the same time, it will guard against the bear trap in the 149.00 range. It is recommended to buy the dips.
Trading Recommendations
Trading direction: Long
Entry price: 149.55
Target price: 152.25
Stop loss: 147.00
Deadline: 2023-11-13 23:55:00
Support: 150.40, 150.00, 149.44, 149.03
Resistance: 150.77, 151.23, 151.56, 151.94
