USD/JPY’s strength remains indefatigable. Against its year’s opening level of 115.08, USD has traded a relentless 17.8% higher. Trading up to a 135.59 high has met the neckline calibrated target of 134.95 mentioned in our prior guidance (10 May USD/JPY: The bull remains at the wheel). The correction lower from 135.59 has been shallow and limited to 131.50, barely testing 131.25 (late April’s ceiling). USD remains in an ebullient mood unless it breaks under the 50-day moving average (dma) 129.72. The moving average line that has pulled USD higher from March’s 114 highs as well intersects at 129.72. Hence, this should be a key level to monitor, should USD reverse its directional bias.
Elsewhere, Japan PM Fumio Kishida met up with Bank of Japan (BOJ) Governor Haruhiko Kuroda yesterday to project a united front as JPY sank to a 24 year low against USD. Given the lack of explicit referencing or prioritising policy over JPY, the meeting appears to be one hollowing out protests ahead of the 10 July House of Councillors election that would elect 124 of its 245 members. This comes after last Friday’s (17 June) BOJ policy meeting saw Kuroda maintaining the BOJ’s current easing stance with a short-term policy rate of -0.1% accompanied by a guidance target that centres around 0% for 10Y JGB yields.
A prior unscheduled meeting was held on 10 June between the BOJ, the Ministry of Finance, and the Financial Services Agency which resulted in a consensus statement expressing concern over the depreciating JPY. The Kishida administration is not exactly toothless – it can invoke Article 4 of the BOJ Act, where it can officially enact and request policy co-ordination to arrest the JPY decline if its weakness proves to be a political hot potato. But the ball is essentially in Kuroda’s court, judging by comments coming from Komeito, the junior coalition partner.
Looking at the monthly chart, USD/JPY remains in full flight. The bull has taken out the horizontal resistance line linking 124.14 and 125.86 without much of a resistance. And now it has taken out the January 2002 highs at 135.15. If it overcomes the next resistance cluster at 136.84-137.20, a Fibonacci extended move to 139.23 looks plausible. Before that, keep a strong tussle as we near 138.25. The Fed emphasises price stability and is singularly focused on taking out inflationary pressure while the BOJ takes a laggard approach to shifting its Yield Curve Control policy. This Fed-BOJ policy divergence remains supportive of USD/JPY.
On the navigation map, USD/JPY is relishing a series of higher highs and higher lows. The market is now still prancing price leg 3, with clear sub-divisions (i)(ii)(iii)(iv)(v) running with the USD bull. The recent drop to 131.50 did exceed the norms of a 38.2% Fibonacci pullback that marked 131.99, but the quick bounce back is indeed telling us the 131.50 drop was merely corrective. Indeed, those expecting the BOJ to follow the footsteps of the SNB last week (hiking 50 bps, in its first rate hike since 2007) were utterly disappointed. Tactically, we enter a USD long at 134.80 adding on at 133.55 with a 132.70 invalidation accompanied by a 137.60 harvest point.