USDJPY – When the BoJ watch FX markets closely so do JPY traders

Chris Weston
Head of Research
3 Aug 2020
The Bank of Japan (BoJ) told us they're watching FX markets closely last week and aside from USDJPY being oversold, the headlines caused USDJPY to print a bullish outside day reversal.

We’ve seen price follow-through in early Asia trade, even pushing through horizontal resistance. However, sellers have hit back and while there is much water to flow under the bridge, the daily candle is shaping up in quite an ugly fashion and could prove to be quite telling.

A close back below the 5-day EMA (105.60) would suggest a renewed move sub-105 and towards Friday’s low of 104.17, in which I can look to trade this as a momentum play. Or, on the week, I also like fading rallies in the pair into 106.80 as a short-term mean reversion trade; 106.80 being where the R2 weekly pivot and implied weekly move in options pricing reside.

With a number of tier one US economic releases and US fiscal debate in play the event risk is worth being across. See our playbook here.

USDJPY daily chart

The line in the sand - 104.80 has held for over two years

The weekly chart highlights the incredible support in USDJPY below 104.80. The wicks on the candles tell you everything you need to know about the demand on display – where the market has stepped in on moves through here and defended with vigour. Without the BoJ adopting a formal price target, such as the SNB did pre-January 2015, its hard to see the central bank directly intervening and selling JPY in the open market. They never had much joy when they tried this in 2011 and they just run the risk of being labelled a manipulator by the US.

USDJPY weekly chart

Flow dynamics have supported the JPY

The Japanese central bank is showing an increasing public level of concern, where a move towards 100 will be deflationary. There are other steps they can do to defend price from falling too far below 105. However, we’re already seeing significant balance sheet expansion, yield curve control and liquidity measures and yet, as we see from the lower pane (the blue line), asset managers have never held a larger net long position in JPY FX futures than they currently do. The upper pane looks at leveraged accounts (hedge funds and alike), where we can see positioning here is far more neutral.

(Source: Bloomberg)

Fundamentally, if we look at the Japanese Ministry of Finance (MoF) weekly flow data, we see Japanese investment funds, some of the largest in the world, have been net sellers of foreign stocks and bonds. This has increased the perception of inflows into the JPY causing USDJPY to trade lower. It’s pretty clear that part of the move in the JPY has been down to investment repatriation flow and we can see this in the data. This could gather further pace if global equities were to sell-off in the period ahead. One to watch going forward, and we’ll update our Telegram channel when this comes out in the future.

It’s a big week for the USD pairs, but USDJPY is especially interesting because the BoJ have just ramped up their level of concern – the question is will they have any success given unfolding event risks and major change (likely to be announced in the September FOMC meeting) to the way the Fed set monetary policy? I suspect not, so I will happily sell strength in USDJPY.

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