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USD/JPY Prints New 24-Year High amid Uncertain Policy Response

USD/JPY News and Analysis

  • Finance ministry response to sharp FX moves leaves much to be desired
  • Risk events: Japanese CPI inflation and Jerome Powell’s address to the US Senate
  • Key USD/JPY technical levels to consider
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Finance Ministry’s Response to Sharp FX Moves Still Under Consideration

In a statement that essentially opened the door for a move higher in USD/JPY, the Japanese Finance Minister Suzuki mentioned that, “the timing and financing sources for swift comprehensive measures to cope with price hikes have not yet been decided”. Mr Suzuki’s comments add to a string of prior statements issued on behalf of the ministry of finance as well as the Bank of Japan (BoJ), in disapproval of the sharp depreciation of the yen.

Prior to last week, the BoJ Governor Kuroda leaned slightly in favor of the yen depreciation as it boosted company profits for firms repatriating foreign income. However, last week Monday the Governor made a U-turn, stating that, “the yen’s recent sharp declines are negative for Japan’s economy and therefor undesirable”.

As dissenting voices gather, it would be reasonable to assume that USD/JPY would find stern resistance to its impressive bull run but that has not transpired. Today, USD/JPY reached a new 24 year high, trumping the prior high of around 135.60. However, warnings from Tokyo and the BoJ regarding yen weakness should not be discounted, especially at a time when it appears that the BoJ will be the last of the ultra-dovish (major) central banks to hike rates – if a rate hike is indeed in the works.

Major Risk Events to End the Week

One factor that has steadied the BoJ’s hand has been the relatively lower level of inflation experienced in Japan, with April’s figure coming in at 2.5% which appears tame when compared to the UK’s 9% or the US’s 8.6%. On Friday, if inflation drastically exceeds estimates, we may see the yen pulling back against the dollar as the chances of a first rate hike from the BoJ increase.

Also, Fed Chairman Jerome Powell is set to provide his twice-yearly report on monetary policy to the US Senate on Wednesday and Thursday. Questions around the aggressive 75 basis point hike last week will certainly be raised and how the Fed expects to achieve a soft landing after a prolonged period of accommodative monetary policy.

USD/JPY Prints New 24-Year High amid Uncertain Policy Response

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USD/JPY Key Technical Levels

USD/JPY clawed back some losses at the end of last week – a week which saw a surprise 50 bps hike from the Swiss National Bank (SNB), an aggressive 75 bps hike from the fed with more to come depending on data, and confusion out of the ECB regarding its anti-fragmentation tool for the bond market.

However, a solid rejection ahead of the 131.35 level set the scene for another advance in USD/JPY, rising above prior levels with ease. Today, the pair has traded above last week’s high of 135.60, fast approaching 136 flat. Nearest resistance now lies at the October 1998 level of 136.89 followed by 139.26 (May 1998). Support appears at 135 flat, 133.20 and 131.35.

USD/JPY Daily Chart

USD/JPY Prints New 24-Year High amid Uncertain Policy Response

Source: TradingView, prepared by Richard Snow

The monthly chart helps to provide some context of the multi-month bull run and potential turning points in USD/JPY. Historically speaking, the USD/JPY is at very elevated levels which will excite mean reversion traders looking for signs of a potential longer-term reversal.

USD/JPY Monthly Chart Highlighting the 1998 Level

USD/JPY Prints New 24-Year High amid Uncertain Policy Response

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX

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