Forex »USD / JPY towards 20-year highs

USD / JPY is heading towards the highs of the past 20 years. Will the Bank of Japan be able to bring it down?

Whenever the exchange rate has reached these forex levels in the past, the Bank of Japan (BOJ) and other financial officials have threatened to intervene in the market.

The Japanese yen has been extremely weak in forex lately. While many countries around the world have started to raise their key interest rates, Japan’s short-term interest rate is at -0.1%. Additionally, the Bank of Japan said it will aim for between 0% and 0.25% for its 10-year JGBs. In recent weeks, the BOJ has entered the market to buy bonds. In doing so, the BOJ can limit the benchmark interest rate yields to 0.25%.

However, one of the side effects of buying JGB is that it weakens the yen in forex.

Furthermore, inflation levels in Japan remain low, which also maintains pressure on the yen. Japan’s February CPI was 0.9% yoy. Compare the US CPI for the same month at 7.9% YoY and the recently released March print of 8.6% YoY!

Higher inflation readings lead to a rise in domestic currency forex. This is another reason why the yen has been so weak against other currencies, such as the US dollar.

Weak growth also dampens the prospects for a stronger yen. On Monday, the Bank of Japan lowered its valuation in 8 of the 9 economic regions in its quarterly report, citing very high uncertainty due to the effects of the Russian-Ukrainian war.

The BOJ is particularly concerned about the rising cost of raw materials and ongoing supply chain problems stemming from the coronavirus. New growth forecasts are expected from the BOJ at the end of April.

Due to the weakness of the yen in forex, many yen pairs have been strong. The pair USD / JPY it is approaching the highs of the last 20 years at 125.85.

If USD / JPY breaks through this level, it will be at its highest level since May 2002. However, the rate has been at or near the 125.00 level several times since 2002.

USD / JPY monthly chart

Source: Tradingview, Stone X

Whenever the exchange rate has reached these levels in the past, the Bank of Japan and other financial officials begin to “stun” the pair to the downside or threaten to intervene in forex to try to prevent the yen pair from rising.

On Monday, a BOJ official warned that the yen’s excessive volatility could hurt businesses. Today, the Japanese finance minister said that “we will respond to changes if necessary by maintaining close communication with the United States and other countries”.

Will the BOJ push USD / JPY lower?

It may take longer, but the USD / JPY is once again breaking out of the 125.85 level and holding resistance so far. Also, over the daily time frame, the price formed an ascending wedge.

If the price were to break below the wedge’s lower trend line (currently near 124.20), it would point to the low of the wedge near 121.78. Note that the RSI also diverges with the price, indicating that the price may be ready for a withdrawal. Below is the 50-day moving average near 118.20.

If the price rises, the next resistance level is not up to the psychological resistance of the round number at 130.00, hence the 2002 horizontal resistance at 131.84.

USD / JPY daily chart

usd / jpy forex 12042022
Source: Tradingview, Stone X

The USD / JPY pair is also strongly positively correlated with the US 10-year yield. The current correlation coefficient is +0.93. A reading of +1.00 is a perfect positive correlation which means that the yields and the USD / JPY pair are moving in the same direction 100% of the time.

Therefore, if US yields retreat, there is a good chance that USD / JPY will also decline (and vice versa).

There are several reasons why the yen is weak in forex, and therefore the USD / JPY pair is bullish. However, if the Japanese authorities continue to weigh on the yen (or even intervene!), The pair could decline. Also, due to the high correlation, if US yields fall, it could lower the USD / JPY pair. However, watch out for the 125.85 level. If the price moves above, the pair could head towards 130.00.

By Joe Perry, CMT, FOREX.com »Official site

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Disclaimer: The information and opinions contained in this report are provided for general information purposes only and do not constitute an offer or solicitation to buy or sell any forex or CFD exchange contracts. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, and assumes no responsibility for any direct, indirect or consequential damages that may arise from the fact that someone relies on such information.

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