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

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.