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18.09.2018 04:43 AM
USD/JPY. The sword of Damocles for the Japanese Yen

The Japanese currency on the first trading day continues to test the 112th figure, demonstrating its ambitions for the development of a larger upward movement. This week plays a big role for the yen: on Wednesday the Bank of Japan will hold a meeting, on Friday the data on the growth of Japanese inflation will be published, and on the weekend the US-Japanese trade talks will be held. If these puzzles develop into a uniquely negative picture for the yen, the USD/JPY pair can not only update the annual highs, but also get close to the upper line of the Bollinger Bands indicator on the monthly chart, reaching the area of the 115th figure.

It is worth noting that the bulls of the USD/JPY pair have a hard time: the yen is forced to react not only to the internal fundamental background, but also to the external one. As a rule, these factors have the opposite meaning for the yen, so the price dynamics follows the "one step forward – two steps back" principle. The complexity of the situation is due to the fact that the upward impulse of the pair ends abruptly and often unexpectedly: for this, for example, it is enough that rumors about the escalation of the US-China trade conflict appear on the market. The topic of Brexit, the Turkish crisis, NAFTA - this is not a complete list of factors, the aggravation of which leads to a rise in the price of the yen. Even Trump's statement about a possible exit from the WTO influenced the dynamics of the Japanese currency. Therefore, it is not appreciative to make any predictions for a pair based solely on fundamental factors, as the development of many events is almost impossible to predict.

But if we talk about the events of this week, the attention of traders will be largely focused on the events of the "inner kitchen". Although the market does not expect any decisions from the Bank of Japan, the tone of its rhetoric can provoke strong volatility. Let me remind you that two months ago, the Japanese regulator changed the marginal limits of long-term interest rates, thus expanding the expected range. Given the dynamics of inflation, many experts said that the focus should be on the lower limit, not the top (there is no question of raising the rate). Therefore, the actions of the Japanese Central Bank are precautionary: Haruhiko Kuroda made it clear that further easing of monetary policy is one of the working options of the central bank. He never denied this fact, but earlier such a scenario was hidden under the veiled phrase that the regulator is "ready to respond to the current circumstances."

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Now the possible reaction has quite real outlines: the rate can be reduced to -0.2%. At least, the Bank of Japan has prepared the market for such an event. Much depends on the further dynamics of economic growth and inflation. Japan's GDP in the second quarter increased by 3%, thus recovering from a decline in the first quarter. This decline had a negative impact on the yen, as up to this point the Japanese economy showed a positive trend for a record amount of time (8 consecutive quarters) – such a "sprint" was last recorded only in the 80s.

Therefore, the third quarter indicator will play a big role in this context. Experts in the majority are pessimistic – primarily because of the weather conditions. In the summer, Japan had heat waves and equally heavy rains, which were also marred by natural disasters: the most powerful typhoon in the last 30 years, severe flooding and an earthquake in Osaka. All these sad events of "hot" in every sense of the summer brought huge losses, and the influx of tourists fell to a five-year low. For the same reasons, inflation may also slow down: the core inflation rate, which includes petroleum products but excludes volatile food prices, rose by only 0.8% in July, as in June.

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Thus, this indicator remains significantly below the target level of the Japanese regulator - and this fact will certainly affect the tone of Kuroda's rhetoric. Here it is worth recalling that the central bank at its last meeting said that inflation will be below the target for a long time – according to preliminary estimates, until the beginning of 2021. After that, most foreign exchange strategists shifted their forecasts for the end of the stimulus program until the end of 2020 with a possible prolongation.

Thus, the issue of normalizing monetary policy will not be included in the agenda of the Bank of Japan for a long time. This is not news for the market, so the usual rhetoric about maintaining the parameters of monetary policy at the current level will not cause unrest. But the probability of interest rate reduction further into the negative area will have a strong pressure on the yen. If Haruhiko Kuroda hints at such a probability (even without time reference points), then the growth of the pair can take an impulsive character. By and large, this is the only intrigue of the September meeting – but its resolution can significantly strengthen the position of USD/JPY bulls.

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From the technical point of view, the pair on all the "higher" time frames (from H4 and above) is located between the middle and upper lines of the Bollinger Bands indicator, which indicates the priority of the upward direction. On D1 and W1 the Ichimoku indicator formed a bullish "Parade of lines" signal. The strongest resistance is at the level of 112.50 is the top line of the Bollinger Bands on the weekly chart. If the pair is consolidated above it, the probability of growth to the upper line of the Bollinger Bands on the monthly chart (that is, to the price of 114.90) will increase in many ways.

Irina Manzenko,
Analytical expert of InstaForex
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