USD/JPY has always been a risk-appetite indicator, which shows the market’s sentiment not only in the foreign exchange market but also in the high-yield equities market and fixed-income low-risk bonds market globally. The main trick is based on the fact that the Bank of Japan is traditionally interested in supporting local exporters by soft financial conditions inside the country, creating an additional competitive advantage in the external markets. How could you create such an environment? Exactly, by keeping the yen weak.
The latest BoJ meeting did not bring lots of surprises for currency traders. The Bank of Japan left the interest rates unchanged at the same ultra-low level, keeping the soft monetary policy in order to support the export-oriented economy. But there were some significant changes in regulator’s rhetoric in inflation forecasts. BoJ lowered its predictions for inflationary pressure from both consumer and producer sides, underlining that current financial conditions would have a longer period and additional liquidity might be injected into the financial system. That’s a supportive factor for USD/JPY.
On the other side, the US economy is currently in much better conditions, despite the recent woes about a possible slowdown or even recession. The market’s sentiment shows that possible negative impact of higher interest rates has been overestimated and the latest drop in equities was too deep. US stock indices keep leading global equities in the consolidation phase. We’re entering the season of corporate earnings and preliminary reports show that things aren’t so bad as it was previously anticipated. Another bull run in stock indices could lift USD/JPY sharply higher, and we should get ready for such a scenario.
Technically speaking, USD/JPY is in the uncertain territory with a more consolidation bias rather than a strong trend conditions. Ichimoku Cloud trend indicator signals a downtrend with the span in bearish mode. However, the current price managed to find decent support above two Ichimoku lines, staying below the cloud itself. Traditionally, that means a consolidation range before testing the upper range of Ichimoku Cloud system. Three more observations are interesting and they could have a meaningful impact. First, the span narrowed its negative range, reaching a bullish reversal pattern and showing that the latest bearish action is exhausted the momentum. Second, price tested the psychological level of 110.00 yen per dollar recently, and there are no deep pullbacks even though both attempts were unsuccessful. Traders are seriously intended to break that resistance in the very nearest days, which should lead to further bullish achievements. Third, both Ichimoku lines crossed each other, confirming the bullish strength and placing another brick in the wall of a bullish reversal pattern. All of those technical analysis tips are showing that the latest sharp drop of USD/JPY is nothing but fake movement with an intention to kick out small retail traders of the market before reversing and going far North.
The trick is that there is no significant technical resistance between 110.00 and 112.00 with the only exception of 111.75 horizontal static line (blue), which used to hold prices in October 2018. Once the price breached 110.00 resistance, the road will be open to the same range which used to work in the second part of 2018. So, buying call options for USD/JPY might be attractive, especially in the medium-term perspective. The nearest support is placed around 108.80, and conservative traders should monitor that level for buying call options.