The JPY fell across the board and especially against the US dollar as traders interpreted the recent Bank of Japan actions as being bearish for the currency. During the week there were also some BOJ (Bank of Japan) members speaking, and they were all calling for lower levels for the JPY as this would help the troubled Japanese economy.
Due to a decade long period of deflation, BOJ embarked on a vast quantitative easing program in order to bring inflation towards the 2% central bank target. The program aims at buying Japanese government bonds, or JGB’s, in huge amounts, with the intent of helping the economic growth again.
What is impressive about this program is that it is way more aggressive than the one that is running in the United States, and it is applied to an economy that is three times smaller. Even this should not be a problem if the whole quantitative easing strategy was a path familiar to central bankers. These strategies are uncharted territory for modern economies, therefore there is always the risk that it will simply not work due to the large dynamics in place.
The USDJPY pair is printing highs not seen since 2008. It’s going to be interesting to see if the JPY can keep the pace with trader’s expectations. At current levels, the vast majority of traders are on the short side for the JPY.
We would be a bit more skeptical as the current price structure on the USDJPY pair, on the bigger time frames suggests a possible rising wedge in progress. This is not boding well with the bullish view.
The wedge comes from the daily chart and follows a contracting triangle that broke higher, but only for the market to advance with clear corrective waves, leaving us with all these highs being made in a corrective fashion.
For the rest of the week there are only two important events that can influence the pace of the JPY depreciation, or change its course: BOJ Governor Kuroda is speaking on Friday – and we all know that when central bankers are singing, markets are dancing. Also on Friday, the US Retail Sales will definitely move the pair.
While everyone is bearish on the USDJPY, be prepared for a possible nasty comeback as positioning to the upside is starting to feel crowded.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
