Japanese Yen Trust Points to Further Upside

The Japanese Yen has finally managed to break out to the upside since the start of this year, posting some strong moves in the first two months of the year already. Despite the surprise rate cut to -0.10%, the Yen remained resilient leading many to question the effectiveness of negative interest rates. While negative rates might not have that big of an impact on the exchange rates, as ECB’s Mario Draghi recently put it, the focus is more on the credit and lending markets rather than the currency markets. At the time  of writing, USD-JPY is down -7.20% on a year to date basis, falling to lows of 111.0, which incidentally is a level which many market participants believe to be the line in the sand for the Yen sparking rumors of BoJ intervention in defending this level. In 2015, USD-JPY closed out the year with small gains of just 0.25%.

With the first quarter of the year almost done with, the focus shifts to how monetary policy will be shaping the markets into the second quarter. As far as Japan is concerned, the optimism in BoJ’s Kuroda seems to be waning, at least the part about reaching the inflation target of 2.0%. At last reading, the Bank of Japan’s Core CPI was down to 1.10%. It is now expected that the next move from the BoJ as far as policy easing is concerned could be ramping up its QQE monetary base, which currently stands at 80 Trillion Yen. However, going by the BoJ’s own acknowledgement that the measures implemented so far has failed to translate to any positive trends in inflation it would be difficult to pinpoint how the BoJ will move at its next meeting in April.

The Currency shares Japanese Yen Trust which tracks the prices in the Yen has recently broken out from its resistance near 84.0, a level under which the FXY was stuck in since November of 2014. The breakout to the upside of this range is likely to see further legs in the rally. A brief decline back to the 84.0 level could mark a test of the broken resistance for support, in which case, a further rally in the Yen could see a move to as far as 92, where the next main resistance resides.

In the short term, prices are likely to struggle near the current minor resistance at 86.67. In the event of a failure to move above this short term resistance, a decline back to 84 and perhaps down to 82.72 is very much a possibility ahead of the longer term rally to 92.

Translating this to the JPY crosses in the currency markets, it is likely that a short term rally is on the horizon which should see the Yen weaken in the near term ahead of resuming the longer term declines. The biggest move in the JPY crosses will obviously come from the weakest currency, which is likely to be the NZD and the GBP. RBNZ’s dovish rhetoric along with the potential for further rate cuts makes the Kiwi the most likely currency pair to short against the Yen and the British Pound, plagued by the Brexit uncertainty could be the next likely candidate, making NZD-JPY and GBP-JPY two currency pairs to watch out for in the near term (1 – 3-month horizon).

This article was written by Dave Goldstein, Head Analyst of Binarybrokerz.com.