Japanese Yen, JPY Talking Points:
- Last night brought a widely-watched Bank of Japan rate decision. The BoJ made no significant changes to their prior stances despite building anticipation for the bank to begin moving towards ‘less dovish’ policy.
- Instead, the BoJ continued to say that they will ‘closely watch’ the impact of sharp FX moves. To read more, check out Richard Snow’s earlier article entitled, Yen Plummets on BoJ Dovish Stance, Carry Trades Thrive.
- The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
Last night’s Bank of Japan rate meeting did not disappoint in terms of volatility, with the Japanese Yen taking another leap-lower after the BoJ avoided modifying their message that they will ‘closely watch’ the impact of sharp FX moves.
Ahead of the meeting, there was some building expectation that the BoJ may begin to shift away from their uber-loose policy outlay. Given the message from all of the other Central Banks that we heard this week, it seemed logical that the BoJ would similarly take on a bit of caution regarding inflation. Japan did just print its highest inflation read since 2008, with a 2.5% print. On the heels of that data release, Kuroda reiterated his message, saying that the BoJ was waiting for ‘stable’ inflation before modifying their policy and this gave the Yen another strong move-lower.
But, shortly after his comments he had to walk back some of those remarks. Kuroda issued an apology last week for downplaying the impact of inflation on the Japanese public and that, when combined with this week’s hawkish Central Bank outlay made it seem as though something may be brewing in Japan.
Last night, we heard that this is not yet a concern as the BoJ kept their message without much modification. To read more, our own Richard Snow covered the matter earlier this morning. USD/JPY, at this point, has recovered the bulk of this week’s losses, with the pair shooting right back up to the 135.00 psychological level.
USD/JPY Four-Hour Chart
The Fed just hiked by 75 and warned of many more hikes on the way. The Bank of Japan, on the other hand, isn’t yet sharing any details of any anticipated shifts, meaning that, deductively, Kuroda and the BoJ aren’t all too deterred by more Yen-weakness, at least not yet.
Given the way that prices have hit in USD/JPY, with these worries popping up around major psychological levels, such as we’ve seen at spot rates of 125, 130 and, most recently, 135, this could put focus on the 140.00 handle in USD/JPY as being that ‘crutch point’ where the BoJ begins to shift their verbiage.
This could keep the door open for bullish breakout potential in USD/JPY.
USD/JPY Daily Price Chart
Chart prepared by James Stanley; USD/JPY on Tradingview
Perhaps the most exciting part of this development is the potential deviation in FX pairs. As in, if we’re seeing a hawkish shift in one economy while the BoJ remains loose and passive, the potential for trends remains. This is much of what we’ve seen so far this year and this is one of the reasons that the Bank of Japan has been so widely-watched.
As rates in counter-parts increase, such as we’ve seen in the US, so does the attractiveness in long USD/JPY positions given the increasing scope of carry potential.
But, higher rates have been getting priced-in to the US economy for some time already. What about an economy that’s on the verge of a hawkish shift?
The European Central Bank opened the door for rate hikes at last week’s rate decision. And while the messaging didn’t go over well, the fact remains that the Euro-zone is seeing 8% inflation and a 25 basis point hike in July is unlikely to help matters much. So, likely, there will need to be some additional shifting around the ECB which can bring topside potential to the Euro, especially against a currency like the Japanese Yen where such a threat doesn’t appear to yet be on the horizon.
In EUR/JPY, the pair is working on a morning star pattern on the daily chart, indicating a possible bottom on the pullback theme. This keeps the door open for a challenge of the prior highs, plotted at 144.25.
EUR/JPY Daily Price Chart
The BoE is a bit more-hawkish than the ECB and they’ve already raised rates multiple times this year. That’s expected to continue and as we heard yesterday, the Bank of England expects inflation to grow as high as 11% later this year. This removes quite a bit of flexibility from the BoE and, likely, we’ll be hearing of more rate hikes this year.
That exposes the topside of GBP/JPY and there’s a large level sitting a little higher on the chart for longer-term breakout potential. That level is at 168.06 and it’s already built a double top formation. Double tops are often followed for bearish breaks and that potential existed into yesterday’s trade, with a fast move lower that was arrested at the 160.00 psychological level.
Prices have since jumped by 500 pips, with a max move of 625 pips; an astounding move in a short period of time.
GBP/JPY Four-Hour Price Chart
The longer-term look is what’s attractive here, and if buyers can push another test of resistance, the door opens to longer-term breakout potential.
From the below weekly chart, we can see that resistance playing in off of the 61.8% Fibonacci retracement of the 2015-2016 major move. This was a significant period in the pair’s history as this covers the Brexit referendum in GBP.
A break of that resistance opens the door to fresh seven-year-highs.
GBP/JPY Weekly Chart
Chart prepared by James Stanley; GBP/JPY on Tradingview
There’s similar bullish potential in AUD/JPY, with some interplay from longer-term techs in the picture.
The psychological levelat 95.00 has been well-defended in AUD/JPY so far, with some follow-through resistance playing-in off of the 78.6% Fibonacci retracement of the 2007-2008 major move. The 61.8% retracement of that same study was in play a few weeks ago, helping to set the currently monthly low after coming-in as support.
This week’s quick reversal in JPY opens the door for bullish breakout potential here, with a breach of that high from last week denoting a fresh seven-year-high.
AUD/JPY Weekly Price Chart
— Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX