Yen outlook: The BOJ tease yen traders with policy shift

• The BOJ could cancel YCC and shrink balance sheet if their price target is met in a ‘sustainable, stable manner’
• Whilst a typically ambiguous statement, it shows the BOJ are planning an exit
• Governor Ueda’s slightly hawkish comments included reference to rising and heightened inflation expectations
• 135 is a key level for USD/JPY over the near-term
• Potential head and shoulders top on GBP/JPY ahead of BOE meeting on Thursday

The yen was broadly weaker at the Tokyo open, which had us on guard for a sustained bullish breakout on USD/JPY due to the notable rise in bearish bets on yen futures. Yet the moves were short lived and promptly reversed as BOJ’s Governor Ueda teased traders with a YCC cancellation and a shrunken balance sheet.

The mere mention of YCC or balance sheet by the BOJ is enough to whip yen traders into a frenzy. But the fact that Ueda explicitly said YCC could be cancelled and their balance sheet shrunk is an important development, as it clearly shows the BOJ are planning their exit. However, these actions are contingent upon their price target being met in a ‘sustainable, stable manner’, but traders will worry about the details later. He is clearly saying things they want to hear, even if it is ambiguous and lacks a measurable metric.

This caused the yen to broadly rise, knock USD/JPY briefly below 135 and become the strongest major currency of the Asian session.

At their last meeting, the BOJ said they had “decided to conduct a broad-perspective review” of its policies over the previous decades. The review could take up to 1.5 years and is already underway. Speaking on the subject today, Ueda added that the review will scrutinise both benefits and side-effects of past monetary steps. Furthermore, inflation expectations have risen and remain at heightened levels according to the governor.

USD/JPY 1-hour chart:

After its brief rise to a 4-day high after the Tokyo open, USD/JPY finds itself lower for the day and has invalidated the bull-flag breakout.

The 200-bar EMA / 135 handle was probed, yet so far has held as support. And if it continues to hold and build a base, we’d still consider bullish setups given the higher low above a triple bottom.

The 135 area likely remains an important level this session for bulls to defend, as a break beneath it assumes it could head back to the lows of the 134.60 – 135.30 range. In which case bears could switch to lower timeframes and seek bearish continuation patterns.

GBP/JPY 1-hour chart:

A potential head and shoulders top is forming on the GBP/JPY 1-hour chart. Whilst it is admittedly not a textbook-perfect example, it does show that prices have formed a higher low, higher high against the preceding trend and prices are now testing a break to a new cycle low. Furthermore, a bearish engulfing candle has formed near the lows, so we’re on guard for a bearish leg lower.

The H&S top projects a target around 169.34, although note that the 200-bar EMA and 50% retracement level reside near the 169.53 high, and 170 could also provide support along the way. A break above 170.62 invalidates the pattern and assumes bullish continuation.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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