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:Blind Bet on Bottom Fishing Not Recommended, Be ware of Another BOJ Surprise Attack
Summary:
USDJPY continued to break down from its consolidation range and fell to its lowest level since the end of May in the early European session. The pair is currently trading above the 128.00 handle and seems vulnerable to extending its downtrend. Meanwhile, sharply slower U.S. inflation data may continue to push the USD lower, thus favoring the JPY.
CLOSED
130.500
Opening Price
125.000
TP
134.800
SL
148.360 +0.798 +0.54%
1156
Point
Profit
125.000
TP
129.344
Closing Price
130.500
Opening Price
134.800
SL
Fundamentals
The USDJPY showed signs of selling today on speculation that the Bank of Japan may act again when it discusses monetary policy at next Wednesday's BOJ meeting.
At the December BOJ meeting, while the BOJ did not call its monetary policy quantitative tightening, the central bank widened its 10-year interest rate target range from 0.25 to 0.50, which caused long-term interest rates to rise further. The USDJPY fell sharply as markets saw this as the possible beginning of the end of quantitative easing.
So will the Bank of Japan take similar action again when it meets next week? According to the Yomiuri Shimbun report, the BOJ will discuss the impact of its unconventional monetary policy and consider adjusting the policy again. In addition, earlier this week, Japan's December CPI showed inflation rose to 4% from 3% and core inflation rose to 4% from 3.6%. Bank of Japan Governor Haruhiko Kuroda continues to say that inflation is temporary. Investors are using this as a proxy for inflation in Japan; and believe that the BOJ may go along with another similar surprise move. Traders are trying to stay ahead of any adjustment in monetary policy. At the December BoJ meeting, traders were caught "offside" and lost a lot of money. However, traders will not let this happen again at next Wednesday's BOJ meeting. For this reason, investors should not blindly intervene early.
The USDJPY fell more than 500 pips after the Bank of Japan's December meeting, with the pair falling from its October highs in an orderly downward-sloping channel. Today's sell-off of more than 330 pips continues the downward trend following the U.S. CPI data for December. If USDJPY continues to move lower, the next support level is at the 61.8% Fibonacci retracement of the 2022 low to high. Lower support is at 126.36.
The JPY is not only appreciating against the USD. The EUR is also down more than 200 pips against the JPY. In a rising wedge pattern for most of 2022, the pair traded at its highest level since 2014 at 148.40. However, on the day of the last BOJ meeting, EURJPY broke below the trend line at the bottom of the wedge and retraced to the 38.2% Fibonacci level from the 2022 low to 2022 high at 139.23. The price bounced back from there but is again close to that level. Support below is at the Jan. 3 low of 137.38 and then the 50% retracement of the above time frame at 136.40.
Technical Analysis
The drop in USDJPY started with the failure to break the 134.80 resistance level and is now trading below 130.00.
In fact, the pair has been in a channeling downtrend since mid-November; such a curvilinear structure is expected to continue until the start of this year's price spike.
From a technical point of view, the oversold RSI in the hourly chart proved to be the only factor preventing investors from betting on further bearish trades on the pair. However, the oscillators in the daily chart suggest that the path of least resistance for USDJPY remains to the downside. Meanwhile, any further recovery is likely to face fresh selling pressure after meeting immediate resistance near the mid-131.00s, targeting the 125.00 level where this year's surge began. However, bull momentum is more likely to be limited at the 130.50-130.60 level and fade quickly.
On the other hand, the multi-month low near 128.10 reached during the Asian session on Friday now seems to be its short-term support. This is followed by the 128.00 round figure mark, the 61.8% Fibonacci retracement level of the strong 2022 rally. A convincing break below this retracement would be seen as an immediate trigger for a new round of bearish bets and make the pair even more vulnerable.
Overall, the current further downward action is unsustainable, but blind bottom fishing is not recommended. It is recommended to go short at higher channel range pressure levels.
Trading Recommendations
Trading Direction: Short
Entry Price: 130.50
Target Price: 125.00
Stop Loss: 134.80
Valid until: 2023-01-25 23:55:00
Support: 128.10, 127.54, 126.36
Resistance: 129.46, 131.00, 132.96
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You understand and acknowledge that there is a high degree of risk involved in trading with strategies. Following any strategies or investment methodologies is the potential for loss. The content on the site is being provided by our contributors and analysts for information purposes only. You alone are solely responsible for determining whether any trading assets, or securities, or strategy, or any other product is suitable for you based on your investment objectives and financial situation.
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Master of Economics, 8 years in the financial industry, CFA holder, joined HSBC (Hong Kong) Bank in 2013 after graduating from the University of California, USA in the Investment Research and Markets Department. With years of financial market experience and trading experience, having provided excellent investment advice to many brokerages, entity derivatives importers and clients in Greater China.
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