USD/JPY: Retreats from Key Resistance As BoJ Decision Looms

The Japanese Yen (Yen) has weakened to levels not seen since the 1980s. This situation pressures the Bank of Japan (BoJ) to intervene, potentially by raising Japanese government bond (JGB) yields to support the currency. Moreover, the abundant liquidity in financial markets, expectations of a potential BoJ rate hike, and the Federal Reserve’s projected rate cuts create a complex environment for USD/JPY.

The pair’s future direction will depend on whether the BoJ’s measures can stabilize the Yen without disrupting global markets and maintaining investor confidence. This article provides a fundamental and technical overview of USD/JPY to determine the pair’s next direction. It is observed that the pair is currently trading at historical resistance, suggesting a potential correction.

Impact of Yen Weakness and BoJ Policies

The sharp weakening of the Japanese Yen is a significant concern for the USD/JPY exchange rate. As the Yen falls to levels not seen since the 1980s, it pressures the Bank of Japan (BoJ) to intervene. The BoJ might raise Japanese government bond (JGB) yields to support the currency. Such a move could cause Japanese institutions to sell US Treasuries to repatriate funds.

However, the impact on the US Treasury market could lead to higher long-term US interest rates. If Japanese institutions sell US Treasuries, yields could rise, making the Dollar more attractive. This could further weaken the Yen, pushing the USDJPY higher. The market might interpret the BoJ’s actions as a lack of confidence in the Yen, leading to further depreciation. The chart below shows that the 10-year Treasury Note Yield is trading at the support and looking weak.

Moreover, the current financial environment shows abundant liquidity, as indicated by Moody’s Baa corporate bond spread at its lowest level in 27 years. This could support risk assets, but the USD/JPY pair volatility might create uncertainties. If the Yen’s weakness continues, it could disrupt global markets, affecting currency, bond, and equity markets. The outcome will depend on whether the BoJ’s measures can stabilize the Yen without causing adverse effects on global liquidity and interest rates.

Recently, the expectations of a potential rate hike by the BoJ are creating upward pressure on the JPY. Markets speculate that the BoJ might raise rates by 10 basis points to 0.1%, significantly shifting Japan’s monetary policy stance. Additionally, the BoJ is expected to announce plans for tapering bond purchases, which could further support the Yen as it signals a tightening monetary policy.

Furthermore, traders might unwind their carry trades ahead of the BoJ’s policy decision. This would involve selling assets purchased with borrowed Yen, leading to increased demand for the Yen and potentially boosting its value. Japan’s top currency diplomat, Masato Kanda, has highlighted concerns about FX volatility’s impact on the economy, suggesting a cautious approach toward the currency. This caution could influence market sentiment and contribute to a stronger Yen, as the market interprets it as a signal of impending monetary policy adjustments.

Meanwhile, the US Dollar (USD) faces challenges due to expectations of rate cuts by the Federal Reserve (Fed) later in the year, driven by cooling inflation and a softening labour market. This divergence in monetary policy outlooks between the US and Japan could narrow the interest rate differential, making the Yen more attractive relative to the Dollar. As a result, the USD/JPY pair might experience downward pressure, with the Yen potentially appreciating further if the BoJ does proceed with a rate hike and the Fed continues to signal rate cuts.

Long-Term Technical Picture of USD/JPY

Based on the above discussion, fundamental factors indicate that USD/JPY is at a significant point where the BoJ’s decision might trigger a big move. The technical picture suggests a similar situation. The monthly chart below shows the long-term technical outlook for USD/JPY. It shows the pair advancing from a long-term bottom and approaching levels last seen in the 1980s. The long-term technical outlook indicates that the pair has formed symmetrical triangles before significant moves. The symmetrical triangle formed from 1995 to 2007 broke to the downside, leading to a historical low at $75.54 in 2011, followed by a significant increase.

The second symmetrical triangle formed from 2015 to 2020 created a long-term buy signal at $101.25 and initiated a strong price surge. Historical analysis shows this long-term rally began after breaking the long-term downtrend line, highlighted in green. This breakout suggests the long-term direction for the pair is still upward, but the pair is currently trading at a strong resistance point, marked by a grey circle.

Moreover, the pair has been trading within a red arc, which has been a significant resistance during any bull run in the past. Currently, the price is testing a critical resistance area, which could result in a substantial price drop. The RSI indicator also shows similar patterns, indicating the price is currently overbought.

Key Action for Investors and Traders

To further understand the technical picture, the weekly chart below highlights the critical area. Expecting the BoJ meeting this Wednesday, the strong drop last week has already brought the price to the support zone at $151.94, marked by the blue circle. This blue circle is a key area that will decide the pair’s next direction. The blue trend line and the dotted red trend line of the red channel together form a triangle, indicating that the price is currently testing the support region of this triangle. The price could still rise if the BoJ cannot resolve the current weakness in the JPY.

Furthermore, it is interesting to note that USD/JPY is forming a bearish divergence, as observed by the RSI in the above chart. This bearish divergence suggests that any rebound from this support could trigger further selling pressure, potentially lowering the pair. The daily chart below also shows a similar pattern, indicating that the price fluctuates at this key level ahead of the BoJ decision on Wednesday.

A break below the blue trend line around $150 may trigger significant selling pressure, especially given the bearish divergence from the long-term resistance point of the 1980s (as seen in the monthly chart above). Conversely, a break above $162 could further weaken the JPY and strengthen the pair, potentially breaking historical resistance levels. Traders will watch the monetary policy decision closely before executing any trading decision.

Final Words

In conclusion, the sharp weakening of the Yen and the expected response from the BoJ present significant implications for the USD/JPY exchange rate. If BoJ considers raising JGB yields to support the Yen, there is potential for increased selling of US Treasuries, which could impact long-term US interest rates and create volatility in financial markets. The divergence in monetary policies between Japan and the US, with potential rate hikes in Japan and rate cuts in the US, adds complexity to the market outlook.

Investors should closely monitor the BoJ’s decisions, as they could lead to significant movements in the USD/JPY pair, either pushing it higher or lower depending on the BoJ’s measures. From a technical standpoint, USDJPY has reached a solid historical resistance point, and the pair is likely to decline from these levels to stabilize lower. Therefore, any rebound from the current support could present a short-term selling opportunity for traders.