Today’s meeting of the Bank of Japan (BOJ) didn’t foreshadow any serious consequences for financial markets. Expectations that the Japanese regulator’s policy would remain unchanged until the end of current BOJ Governor Haruhiko Kuroda's term in April, were firmly rooted in the quotations of currency pairs with the yen.
It was decided to increase a cap on 10-year Japanese government bond yields from 0.25% to 0.5%. The yield growth automatically makes yen assets more appealing for investment. At first, this step doesn’t seem to be a serious policy tightening in comparison to actions taken by financial regulators in other countries. At the same time, it was the effect of complete surprise, forcing yen sellers to hastily close their positions, and then pushing all pairs with the Japanese currency, including EURJPY, to go down in a snowball effect.
A rise in interest rates in Japan may bring back the yen’s status of safe-haven currency, which it has lost this year after a massive rate hike delivered by almost all central banks. This status will be no less important next year, given the ever-increasing likelihood of a recession in the world's leading economies. But even in this scenario, Japan may have some benefits due to the easing of Covid restrictions in neighboring China and the recovery of economic ties.
Let’s look at the EURJPY chart. If today’s price manages to gain a foothold below 141.5, it’ll open the way to an important level of 139, the area of September’s lows and April’s highs. At the same time, after such a powerful fall as today’s one, the possibility of a certain rebound is highly likely. Therefore, more cautious traders should keep an eye on the level of 143, which is where we might see a continued decline in EURJPY.
The following trading strategies may be offered:
1) Sell EURJPY at the end of the trading day below 141.5. Take profit – 139. Stop loss – 142.
2) Sell EURJPY on the rebound to 143. Take profit 1 – 141,5. Take profit 2 – 139. Stop loss – 144.
Traders may also use a Trailing stop instead of a fixed Stop loss at their discretion.