baona
Originally published on July 31, 2024
Since our last publication, the USD/JPY has shaped the expected mean reversion rebound right above the 151.70 key pivotal support and rallied to hit an intraday high of 155.22 on Tuesday, July 30, just a whisker away from the lower boundary of the short-term mean reversion rebound resistance zone of 155.80/156.50.
Thereafter, the Japanese yen started to strengthen against the US dollar as the USD/JPY shaped an intraday decline of 1.6%/245 pips to close the Tuesday, July 30 US session at 152.76. The reason for this abrupt intraday decline has been a “breaking news” release from a Japanese media outlet that stated Bank of Japan (BoJ) was considering an interest rate hike on Wednesday to increase its overnight policy interest rate to 0.25% from 0% to 0.1% ahead of its monetary policy decision.
BoJ does not surprise (again) and maintained its inflation trend outlook
Fig 1: BoJ Monetary Policy Decision And Latest Quarterly Outlook As Of July 31, 2024 (Source: BoJ website)
These type of “breaking news” leaks ahead of key BoJ’s monetary policy decision seems to be a “modus operandi” to prep markets and reduces the risk of high-volatility moments inflicted on the global markets via the process of messy unwinding of positions that can trigger significant feedback loops in difference cross-assets when the actual announcement takes place; a similar approach was utilized in March when BoJ abolished its “yield curve control” programme on the 10-year Japan Government Bond (JGB) yield and increase its overnight interest rate from a negative level – its first hike since 2007.
The USD/JPY dropped further to test the 151.70 key support (printed an intraday low of 51.60) right after the BoJ’s monetary policy announcement to hike its overnight interest rate for the second time this year and managed to stage a bounce thereafter to print an ex-post BoJ session intraday high of 153.90 at this time of the writing.
In addition, the BoJ’s latest quarterly outlook on inflationary trend in Japan remained the same as the previous April quarter where officials maintained their median forecasts for core-core CPI (excluded fresh food and energy) at 1.9% for fiscal years of 2024 to 2025 and 2.1% for fiscal year of 2026 (see Fig 1).
The BoJ has expressed concerns on imported inflation where upside risks for import prices have increased for fiscal years of 2024 and 2025 on a year-on-year rate of change basis (see Fig 1), which in turn suggests that that on a medium-term horizon, the BoJ has implied indirectly that a further Japanese yen weakness is not desirable, as its adverse effects on consumer confidence and spending outweighs its benefits. That’s a likely driver to see a further weakening of the USD/JPY in the medium-term horizon.
Gradual quarterly reduction of JGBs monthly purchases
Fig 2: BoJ’s Plan For The Reduction Of JGBs Monthly Purchases As Of July 31, 2024 (Source: BoJ website)
Also, without any major surprise, BoJ has “officially” announced its “Quantitative Tightening” programme to reduce its monthly JGBs purchase of 5.7 trillion yen by 50 percent to around 3 trillion yen by Q1 2026 through gradual reduction by about 400 billion yen each calendar quarter (see Fig 2).
This process is likely to see a decrease of around 7-8% in the current huge JGBs holdings that is coming close to 600 trillion yen in the BoJ’s balance sheet and allow market forces to play a more significant role in the determination of long-term interest rates in Japan.
Overall, also a medium-term factor that may lead to lower levels of USD/JPY going forward.
Technical factors are supportive of a minor mean reversion rebound within a medium-term downtrend in USD/JPY
Fig 3: USD/JPY Medium-Term & Major Trend Phases As Of July 31, 2024 (Source: TradingView) Fig 4: US Treasuries-JGBs Yield Spreads Medium-Term Trend As Of July 31, 2024 (Source: TradingView) Fig 5: USD/JPY Short-Term Trend As Of July 31, 2024 (Source: TradingView)
In the lens of technical analysis, price actions of highly liquid tradable financial instruments do not move in a vertical fashion but oscillate within longer-term trend phases.
At this juncture, as seen on the daily chart of the USD/JPY, the medium-term trend of the USD/JPY has turned bearish, as it has broken below its 50-day moving average recently on July 17 after it held prior dips in price actions since March 14, 2024 (see Fig 3).
In addition, the positive yield premium (2-year and 10-year) of US Treasuries over JGBs have continued to shrink, which in turn supports the medium-term downtrend of USD/JPY from unfolding, with the next medium-term supports coming in at 149.50 and 146.20/144.60 (see Fig 4).
The ongoing slide in the USD/JPY (20 days so far) in place of its July 3, 2024 high of 161.95 has reached an oversold condition on the daily RSI momentum indicator.
Coupled with a potential bullish divergence condition being flashed out on the hourly RSI momentum at its oversold region after a test on the 151.70 key short-term pivotal support (also the 200-day moving average), we cannot rule out another leg of minor reversion rebound scenario to occur. A clearance above the 154.60 near-term resistance may see an extension of the rebound to expose the 155.80/156.50 resistance zone before another bearish impulsive downmove sequence unfolds (see Fig 5).
