The Japanese yen bulls are preparing for a period of weakness in the currency until speculation returns on the Bank of Japan's policy adjustment in the June or July meetings. According to trading, the Japanese currency fell to its lowest level in two months against the dollar in the wake of the Bank of Japan’s decision to keep the main stimulus measures unchanged.
The options signal about a 50-50 chance that the price of the USD/JPY currency pair would touch the psychological resistance level 140 by the end of July. Against the euro, it fell to its lowest level since 2008, with the BoJ contradicting the European Central Bank which is expected to continue tightening for the time being.
Accordingly, the strategists at Barclays Plc and Goldman Sachs Group Inc. By shifting their expected timing of the yield curve control revisions - a bullish catalyst for the Japanese yen - to July from June from June. July is when the Bank of Japan's next outlook report is released. "This indicates a later starting point for the yen's appreciation, meaning the currency could move in line with external market factors with a weaker yen bias for now," Barclays wrote in a note.
One such factor is the US Federal Reserve meeting this week, where hawkish comments from officials could boost the US currency. The Fed has seen rates hike even as economic risks mount. A measure of expected decline in USD/JPY in the options market - the so-called risk reversals - eased after the Bank of Japan left yield curve control unchanged, in a sign that traders backed away from their bets on yen strength.
In this regard, Daisuke Ono, chief strategist at Sumitomo Mitsui Banking Company, said: “There are still some people who expect an amendment in the next few months, and as the date of each meeting approaches, there may be some situations that are created for an amendment until July.” Broad yen selling pressure may emerge after July if the Bank of Japan does not present any revision at its meeting.”
However, the Bank of Japan is not the only factor for the yen bulls. And even if the central bank continues to stick to its ultra-easy policy, falling global yields as major developed economies enter recession could add upward pressure on the Japanese currency through the end of the year, according to Capital Economics. He is sticking to a forecast of 125 yen to the dollar by the end of the year.
Currently, the weakness of the Japanese yen is more pronounced against its European counterparts. The Swiss franc hit its highest level since 1979 against the Japanese currency on Friday, while the pound sterling touched its highest level since October on Monday. Chris Weston, Head of Research at Pepperstone Group Ltd, said, “We have seen some huge breakouts of important resistance levels – pull out the daily chart for CHF, JPY, EUR and GBP, the question will be to chase or not to chase,” said Chris Weston, Head of Research at Pepperstone Group Ltd. Tactically, a strong bullish backdrop is in the making, but for now, the yen is the weakest link.”
Forecasts of the US dollar against the Japanese yen:
- The bullish channel of the USD/JPY currency pair on the daily chart has grown stronger.
- The path to the psychological resistance 140.00 is paving, especially if the US Federal Reserve continues to take the tightening approach this week.
- The breach of the resistance 138.30 will be important for a strong control of the bulls, which is the closest to it.
- The loose policy of the Central Bank of Japan under the new leadership helped a lot in the sharp collapse of the Japanese yen.
On the other hand, and for the same period of time, a move towards the support level 135.20 will be important to start controlling the bears. The currency pair may remain around its gains until the reaction to the US Central Bank's decisions this week.
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