USDJPY buying opportunity | 23 December 2022
On the H8 timeframe, USDJPY came to test the 134.500 support level twice before a surprise move by the Bank of Japan sent prices sharply down. On 20 December, the BOJ announced that it would loosen its 10 year bond yield cap from 0.25% to 0.5%. This caught investors completely off guard, and the yield rate subsequently jumped to 0.499%, its highest level since 2015, leading USDJPY to break through the 134.500 support level on the back of a strengthening Yen. USDJPY has settled at the 131.800 support level which coincides with the 161.8% Fibonacci retracement after a significant round of price correction, as investors recalibrate their outlook on Japanese fixed income securities. Price was recently buoyed by upbeat US economic data, where the release of inflation data on 23 Dec could finally trigger a retracement to the previous 134.500 support turned resistance level which coincides with the 100% Fibonacci extension. We expect price to approach the 131.800 support level as our Entry point, which will temporarily retrace to 134.500 where we will Take Profit and exit the trade before USDJPY extends its overall bearish trend in the longer term. We have placed our stop loss at the historical support level of 130.500, which could be approached if the PCE Price Index comes in higher than market expectations. Stochastic RSI has just re-emerged from the oversold region, while prices dipped below the lower bound of the Bollinger Bands, supporting our bullish bias.
The Yen reacted strongly to the initial jump in JGB yields. Higher JGB yields have boosted expectations of greater investment levels in the Japanese bond market as its differential with other securities on the global bond market narrows, which would strengthen the Yen against the Dollar. This is especially the case because low interest rates and bond yields had previously driven out a significant volume of capital to the extent that Japan became the largest holder of US government bonds, owning almost USD $1.3 Trillion of debt. With a narrower yield differential, there is hope that some capital might return home. However, the BOJ’s subsequent statements that it would continue to step up bond buying saw a sharp reversal in yield rates from a peak of 0.499% to its current rate of 0.382%, which could see further declines in the form of a price correction from the market’s initial knee-jerk reaction. This could dampen some of the Yen’s strengthening, which could give a further boost to USDJPY in the short term.
The Yen reacted strongly to the initial jump in JGB yields. Higher JGB yields have boosted expectations of greater investment levels in the Japanese bond market as its differential with other securities on the global bond market narrows, which would strengthen the Yen against the Dollar. This is especially the case because low interest rates and bond yields had previously driven out a significant volume of capital to the extent that Japan became the largest holder of US government bonds, owning almost USD $1.3 Trillion of debt. With a narrower yield differential, there is hope that some capital might return home. However, the BOJ’s subsequent statements that it would continue to step up bond buying saw a sharp reversal in yield rates from a peak of 0.499% to its current rate of 0.382%, which could see further declines in the form of a price correction from the market’s initial knee-jerk reaction. This could dampen some of the Yen’s strengthening, which could give a further boost to USDJPY in the short term.
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