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USDJPY Overbought Conditions May Trigger Corrective Decline
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Summary:
In April, consumer prices in Japan accelerated, with the CPI rising from 3.2% to 3.5%. The core CPI also increased from 3.1% to 3.4%. This indicator has remained above the Bank of Japan's target of 2% for 13 consecutive months, indicating persistent inflationary pressures. Despite these inflationary pressures, there are no clear signs that the Bank of Japan is prepared to withdraw its ultra-loose monetary policy.
Fundamentals:
Japan's inflation rate continues to rise. In April, the core inflation rose to 3.4% year-on-year, higher than March's 3.1% and in line with market expectations. The index excludes fresh food but includes energy items. The index closely monitored by the Bank of Japan, which excludes food and energy, rose 4.1% year-on-year in April, reaching its highest level since September 1981.
The increase in inflation, coupled with an unexpected rise in domestic gross domestic product in the first quarter, has sparked speculation about the Bank of Japan potentially starting to gradually unwind its decades-long ultra-loose policy.
As we all know and have repeatedly stated, the Bank of Japan maintains the view that the current high inflation is cost-driven and expects inflation to start declining around September to October this year.
The newly appointed Governor Haruhiko Kuroda has stated that he will not change the policy until inflation remains around 2% and wage growth strengthens. Core inflation has remained above the central bank's 2% target for over a year, and the market is scrutinizing every comment from the Bank of Japan for any signs of a policy shift.
Speculators have long seemed to be playing a game of cat and mouse with the Bank of Japan, betting that new Governor Haruhiko Kuroda will take action to tighten policy, which would push up the yen. With the yen falling below 138.00, nearing the key psychological level of 140.00, the possibility of government intervention in the foreign exchange market to stabilize the yen and confront speculators is increasing.
Currently, the yen's dilemma persists, with a sharp drop of 470 points on Thursday, reaching a six-month low. At the same time, the US dollar rose to 138.75 against the yen, a daily increase of 0.61%. Since November 2022, the currency pair has not reached such high levels. Indeed, the significant rise in the US dollar against the yen also indicates the end of a six-day rebound, as the yen is in positive territory.
Furthermore, the correlation between the US dollar against the yen and the Nikkei 225 index may strengthen. Since April, foreign investors have significantly increased their investments in the Japanese stock market, resulting in better performance of Japanese indices compared to global indices.
Since April, the yen has been the weakest among major currencies, suggesting that foreign investors may be hedging forex risks while investing in the Japanese stock market. Considering the historical weakness of the yen, the dynamic of "the more the Nikkei index rises, the weaker the yen becomes" may strengthen if foreign investors increase their investments in Japanese stocks and hedge their forex exposure.
Technical Analysis:
The USD/JPY pair has experienced a significant rally this week, breaking through the key resistance level of 137.50-138.00 and continuing its upward trend. However, as mentioned earlier, after the sharp rise in price, the yen is now in a positive trend, indicating that the USD/JPY pair may enter a corrective mode in the short term.
Technical chart patterns indicate that although there is further upside potential for the USD against the yen, with RSI and MACD trending upward in the bullish zone, the stochastic oscillator is already in the overbought territory. Therefore, continued upside may face short-term downside risks.
Currently, with price trading below yesterday's high of 138.75 and considering the approaching weekly close, it may struggle to hold above that level, and the next major resistance at 139.00 is unlikely to be threatened. We expect price to revisit the 136.20 range in the short term.
On the downside, breaking below the 20-day moving average and trendline support at 135.00 could push the price lower towards the 133.80-133.00 area. This area aligns with the 50-day and 200-day moving averages and the 23.6% Fibonacci retracement level. Failure to rebound from this level could trigger a new bearish correction, targeting the upward trendline around 131.80 in 2023.
Looking ahead, the next resistance above 139.00 is at 139.60. As long as the currency pair remains above 136.20, its strength remains intact. In terms of trading strategy, it is advisable to focus on corrections and consider short positions on rallies.
In April, consumer prices in Japan accelerated, with the CPI rising from 3.2% to 3.5%. The core CPI also increased from 3.1% to 3.4%. This indicator has remained above the Bank of Japan's target of 2% for 13 consecutive months, indicating persistent inflationary pressures. Despite these inflationary pressures, there are no clear signs that the Bank of Japan is prepared to withdraw its ultra-loose monetary policy.
Fundamentals:
Japan's inflation rate continues to rise. In April, the core inflation rose to 3.4% year-on-year, higher than March's 3.1% and in line with market expectations. The index excludes fresh food but includes energy items. The index closely monitored by the Bank of Japan, which excludes food and energy, rose 4.1% year-on-year in April, reaching its highest level since September 1981.
The increase in inflation, coupled with an unexpected rise in domestic gross domestic product in the first quarter, has sparked speculation about the Bank of Japan potentially starting to gradually unwind its decades-long ultra-loose policy.
As we all know and have repeatedly stated, the Bank of Japan maintains the view that the current high inflation is cost-driven and expects inflation to start declining around September to October this year.
The newly appointed Governor Haruhiko Kuroda has stated that he will not change the policy until inflation remains around 2% and wage growth strengthens. Core inflation has remained above the central bank's 2% target for over a year, and the market is scrutinizing every comment from the Bank of Japan for any signs of a policy shift.
Speculators have long seemed to be playing a game of cat and mouse with the Bank of Japan, betting that new Governor Haruhiko Kuroda will take action to tighten policy, which would push up the yen. With the yen falling below 138.00, nearing the key psychological level of 140.00, the possibility of government intervention in the foreign exchange market to stabilize the yen and confront speculators is increasing.
Currently, the yen's dilemma persists, with a sharp drop of 470 points on Thursday, reaching a six-month low. At the same time, the US dollar rose to 138.75 against the yen, a daily increase of 0.61%. Since November 2022, the currency pair has not reached such high levels. Indeed, the significant rise in the US dollar against the yen also indicates the end of a six-day rebound, as the yen is in positive territory.
Furthermore, the correlation between the US dollar against the yen and the Nikkei 225 index may strengthen. Since April, foreign investors have significantly increased their investments in the Japanese stock market, resulting in better performance of Japanese indices compared to global indices.
Since April, the yen has been the weakest among major currencies, suggesting that foreign investors may be hedging forex risks while investing in the Japanese stock market. Considering the historical weakness of the yen, the dynamic of "the more the Nikkei index rises, the weaker the yen becomes" may strengthen if foreign investors increase their investments in Japanese stocks and hedge their forex exposure.
Technical Analysis:
The USD/JPY pair has experienced a significant rally this week, breaking through the key resistance level of 137.50-138.00 and continuing its upward trend. However, as mentioned earlier, after the sharp rise in price, the yen is now in a positive trend, indicating that the USD/JPY pair may enter a corrective mode in the short term.
Technical chart patterns indicate that although there is further upside potential for the USD against the yen, with RSI and MACD trending upward in the bullish zone, the stochastic oscillator is already in the overbought territory. Therefore, continued upside may face short-term downside risks.
Currently, with price trading below yesterday's high of 138.75 and considering the approaching weekly close, it may struggle to hold above that level, and the next major resistance at 139.00 is unlikely to be threatened. We expect price to revisit the 136.20 range in the short term.
On the downside, breaking below the 20-day moving average and trendline support at 135.00 could push the price lower towards the 133.80-133.00 area. This area aligns with the 50-day and 200-day moving averages and the 23.6% Fibonacci retracement level. Failure to rebound from this level could trigger a new bearish correction, targeting the upward trendline around 131.80 in 2023.
Looking ahead, the next resistance above 139.00 is at 139.60. As long as the currency pair remains above 136.20, its strength remains intact. In terms of trading strategy, it is advisable to focus on corrections and consider short positions on rallies.
Nota
Trade Recommendation:Trade Direction: Short
Entry Point: 138.50
Target Point: 135.50
Stop Loss Point: 140.90
Valid Until: 2022-06-02 23:55:00
Support Levels: 137.66, 136.33, 135.64
Resistance Levels: 139.00, 139.60, 139.88
Penafian
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