Potential USD/JPY trade idea

It was clear from the collapse in USD/JPY that the trading community was disappointed in the failure of the BoJ and Mr Kuroda to hint at further easing.

USD/JPY hit a low of 101.55, which coincided with the rising trend drawn from the February 4 low. The MACD on the daily chart has traded through the signal line but there is still a chance this proves a failed signal. However, given the indicator is still above zero the pullback looks like a buying opportunity.

The consensus in the market had been that the BoJ would strongly hint at future increases in the purchase of its bond buying program, with many also suggesting increased buying of ETF’s and even changing the duration of its holdings. In fact, what we heard from Mr Kuroda was actually a fairly upbeat assessment of the Japanese economy and a reasonable emphasis that further easing is not on the cards.

The next BoJ meeting takes place on April 30 and there is talk on the floors that the BoJ could look to shift to a monthly target for asset purchases, similar to the Fed. It’s hard to think the BoJ will change its opinion on easing in the next two weeks or so, so it’s likely this meeting will have limited effect on the JPY and only a strong rally in the JPY could see the BoJ give a stronger hint of policy change.

The fact is the Japanese economy has improved over the last 12 months; however the momentum behind the recovery in inflation and business sentiment has plateaued of late. The recent TANKAN report highlighted a sizeable drop off in the outlook from large manufacturers, while views from both large and small companies showed inflation expectation well below the BoJ’s 2% target. However it seems the move overnight was the market shifting its expectations of future easing from May-July to July-September.

With the market having re-priced the chance of chance of BoJ easing, and the FOMC minutes out tomorrow morning (at 4am AEST) and likely to be a hawkish affair, I feel long USD/JPY positions look good. With spot price now at 101.90, I like buying at market, with a stop at 101.15 (just below the March 14 low). I think the upside is fairly limited, so will target a move back to 103.00.


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