The USDJPY, like almost all currency pairs with the U.S. dollar, yesterday showed quite a high amplitude of movement. The yen made its strongest move up against the dollar since 1998, going from 146.4 to 140.2. After a small rebound, it closed Thursday at 140.95.
The release of the U.S. inflation data for October had a bombshell effect on financial markets. A sharp slowdown in price growth from 8.2% to 7.7% gave market participants a huge boost of optimism, which led to a massive sell-off of the dollar and purchases of risky assets.
Still, there is a feeling that the massive shift of investors and traders to the bull camp was hasty. We have already seen the first signs of a slowdown in inflation over the summer, but they have never resulted in a sustained trend and a reduction in the Fed's aggressiveness in its policy implementation. It is important to note, however, that not only headline but also core inflation, which the Fed views as a key indicator of price growth, declined during October.
Still, a one-time slowdown in core inflation is unlikely to be enough to reverse the Fed's policy; at the very least, we should wait for more monthly data on price growth and the labor market in early December. If the trend is confirmed, we may indeed hear talk of a gradual unwinding of the rate hike at the December 14 Fed meeting. However, there is still a month before that moment during which a lot can happen.
The Bank of Japan has already said that it is seriously worried about such a high volatility of the yen, no matter in which direction it is headed. As surprising as it looked a couple of days ago, after yesterday's events we might really see the BoJ intervening to sell the yen and buy the dollar, not vice versa. And the general desire of the market to push up from the round level of 140 on USDJPY is clearly present as well.
The following trade option can be suggested:
Buy USDJPY no lower than 140.9. Take profit 1 – 142,4. Take profit 2 – 143,5. Stop loss – 140.
Also, traders may use Trailing stop instead of a fixed Stop loss at their discretion.