The USDJPY currency pair fell significantly by about 1% during Thursday's trading session. The pair updated the lows of the beginning of September, breaking the level of 146 from above downwards. At this pace, before the end of the week, the price could test the level of 144, which corresponds to the highs of June-July. Given the recent news, the probability of such a scenario increases sharply.
A sharp strengthening of the yen is due to the speeches of the Bank of Japan’s leaders. The head of the regulator Kazuo Ueda and his deputy Ryozo Himino held speeches where they presented their views on abolishing negative interest rates. According to Ueda, the Bank of Japan has not yet decided on the target level of the rate, it will depend on a number of financial conditions. Nevertheless, Ueda pointed to the possibility of raising the key rate as high as 0.5% from the current -0.1%.
Before the speeches of Japanese officials, traders estimated the possibility of tightening the monetary policy of the regulator at the meeting on December 19 at only 3.5%. By the current moment this probability has soared to 45%. The yield on 10-year Japanese bonds reached the level of 0.75%, which corresponds to last year’s December high. 30-year debt offers a yield of 1.7%.
According to Shoki Omori, strategist at Mizuho Securities, the fall of the Japanese bond market is sharp. Earlier, market participants expected a key rate hike in April, but now they are actively betting on January. Tadashi Matsukawa from PineBridge Investments Japan considers the beginning of 2024 as the best time to tighten monetary policy. At that time, the Fed and other central banks are likely to remain in a “wait-and-see” mode and the Bank of Japan won’t need to follow their example.
On the daily USDJPY chart, the RSI indicator is gradually approaching the oversold zone, but there is still a potential for additional decline. The chances of a rebound will increase when the price touches the level of 144, where at least part of short positions should be fixed.
The following trading strategy can be suggested:
Sell USDJPY at the current price. Take profit — 144. Stop loss — 146.7.
Traders can also use a Trailing stop instead of a fixed Stop loss at their discretion.