The USDJPY pair continues its ascent. The peaks of 2002 have already been reached and now the targets of the "bulls" are shifting to the levels of 1998, which is even more distant. The USDJPY buy-the-dips tactics are still working, which means that we can still expect the dollar to be stronger and the yen to be weaker.
If someone would have said a couple of months ago that a 0.75% increase of the Fed key rate at once would not cause a sharp negative reaction of the market, this statement would not be taken seriously. However, that is exactly what happened yesterday; the most significant rate rise since 1994 caused an upward bounce of stock indexes and led to the dollar's fall. This reaction, though, was clearly caused by profit fixation on previously opened positions, rather than reassessment of the monetary policy prospects in the U.S. for the better.
And monetary policy will continue tightening in the coming months. Now the Fed expects the key rate increase to the range of 3.25-3.5% by the end of the year, i.e., from the current level of 1.5-1.75%, the rate will increase twice. At this rate level, U.S. bonds look much more attractive than European ones, and even more attractive than Japanese bonds.
The Bank of Japan keeps trying to hold government bond returns below 0.25%. Japanese regulator's representatives directly say that low level of interest rates is more important for the national economy than a stable Yen exchange rate. Thus, the growing spread in US and Japanese bond returns will continue to push the USDJPY up.
After the USDJPY grew by 6.3% in the first half of June, it's time for a slight correction. The "bearish engulfing" on the graph as well as the RSI indicator reversal downwards in the overbought zone are also pointing in favor of a slight decrease. Nevertheless, for now it is not expected that the USDJPY will fall dramatically, after the correction it is much more possible that a new movement to the new long-term maximums will start. The next growth targets are the Fall 1998 maximums at 137-138 levels.
The following trading strategy option can be suggested:
Buy USDJPY in the 132.5-134 range. Take profit - 137.3. Stop loss - 131.5.
Also, traders may use Trailing stop instead of a fixed Stop loss at their convenience.
This content is for informational purposes only and is not intended to be investing advice.
