Bank of Japan remains cautious, not allowing the yen to strengthen significantly

02 August 2023 185
Bank of Japan remains cautious, not allowing the yen to strengthen significantly

The USDJPY currency pair is gradually regaining its positions after a strong correction in early July. Price is getting closer to the highs of this year, located in the range of 144–145. Today's downward pullback may slightly postpone the July highs achievement, but is unlikely to prevent it. The US dollar isn’t weak enough for the yen to strengthen significantly.


Even yesterday's actions of the Fitch agency did not prevent the growth of the American currency. Its representatives downgraded the US credit rating from AAA to AA+. Fitch pointed to the worsening situation with the budget deficit over the next three years and the growing burden of the national debt. However, buyers of dollar bonds were not frightened by such unexpected news. The habit of using the dollar as the main protective asset is too strong to be changed by a one-time deterioration of the US credit rating.


In turn, the yen continues to be under pressure from too low yields in the Japanese bond market. The actions of the Bank of Japan, which on Friday increased the yield on government debt from 0.5% to 1%, did not significantly change the situation. The interest rate gap with other countries remains too wide for large investors to be interested in buying yen.


An additional argument in favor of the USDJPY pair growth could be today's statements of the Deputy Governor of the Bank of Japan Shinichi Uchida. According to him, the changes in the level of bond yields, adopted last week, do not mean the abandonment of the ultra-soft monetary policy. According to a Bloomberg poll, market participants do not expect any changes in the Bank of Japan's policy until spring 2024. But even then the regulator must first completely abolish control over bond yields, so that it can raise the key rate. Until then, the yen will weaken further.


The RSI indicator is approaching the overbought zone, but no reversal signal has been formed yet. The USDJPY pair has a high chance of updating the yearly highs before moving into the correction zone.


The following trading strategy can be suggested:


Buy the USDJPY in the range of 142–142.5. Take profit 1 — 144. Take profit 2 — 145. Stop loss — 141.

This content is for informational purposes only and is not intended to be investing advice.

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