Japanese Yen Sellers Seek Profits Near ‘Kuroda Line’

  • JPY sellers target USD/JPY move to 125
  • Fed-BoJ Divergence, Energy Prices Quoted
  • Profit taking could sabotage rally near 125
  • GBP/JPY could see a post-referendum high

Above: Archive image by Haruhiko Kuroda © European Central Bank, reproduced under CC license.

The yen has rebounded strongly from multi-year lows ahead of the weekend, but with some recent sellers looking to take profits closer to the oft-cited ‘Kuroda line’ near 125 in USD/JPY, there is a risk of further losses. for Japanese currency. in the days and weeks to come.

The Japanese yen was the strongest performer among major currencies on Friday, as steep losses early in the week were partially reversed ahead of the weekend and alongside a stall in the recently rising spread or spread between US and Japanese government bond yields.

The yield spread between the United States and Japan was widely cited as one of the drivers of the strong sell-off in the yen this week, although it stagnated on Friday after the release of March inflation data. for Tokyo and remarks from Finance Minister Shun’ichi Suzuki and Bank of Japan (BoJ) Governor Haruhiko Kuroda.

“The 10-year JGB traded up 0.24% overnight, a cycle high, and would theoretically require the BoJ to speak out and declare a new explicit yield cap defense as it does. did in February,” says John Hardy, head of FX strategy at Saxo Bank.

Data from the Bureau of Statistics suggests that Tokyo’s inflation rate rose faster than markets had expected this month, even after excluding changes in energy and food costs, which potentially explains the rise in Japanese yields and part of Friday’s rebound in the yen.

USD to JPY daily

Above: USD/JPY displayed at daily intervals with the spread or spread between US and Japanese 10-year government bond yields.

But with BoJ Governor Kuroda recounts in Japan’s parliament overnight that the current combination of inflationary pressures is unlikely to sustainably achieve the BoJ’s 2% inflation target, it’s possible that Friday’s rally in the yen is just a interlude before a new weakness.

With the BoJ doubting that its inflation target will be met at some point in the near future, it is widely seen as particularly unlikely to change its monetary policy at some point in the near future and all the while policy from the Federal Reserve should boost the attractiveness of the dollar against the yen.

“Powell gave the impression that the Fed’s dot chart may be too low and strongly indicated that a series of 50 is on the table as soon as the next meeting. The implication is that the Fed is rushing to This should keep rate differentials firmly slanted higher in USDJPY,” said Mazen Issa, senior FX strategist at TD Securities, referring to a speech by Fed Chairman Jerome Powell on Tuesday. .

Updated forecasts this month suggest the Federal Reserve is on track to raise its interest rate sharply over the next year or more, likely taking it above the rate of inflation. targeted and further to a level that would lead to downright “tight” monetary conditions.

USD to JPY weekly

Above: USD/JPY displayed at weekly intervals with Fibonacci retracements of the 2015 drop indicating likely areas of technical resistance for a fresh rally.

Fed policymakers, meanwhile, have signaled that the bank could move even faster than the March forecast suggested and all of this suggests that the returns offered to investors in US assets could soon far exceed those available. in Japan.

“This should help enforce a floor below USDJPY; the break above 120 suggests a new 120/125 range is on our doorstep for now. commodity trading, which is likely to continue. Combined, USDJPY has nowhere to go but higher, and our positioning screen suggests yen weakness is the most significant risk,” TD Securities’ Issa said in a note to clients on Tuesday.

The growing rift between the Fed and the BoJ is one of the main factors cited by Issa and his colleagues at TD Securities when they told clients on Tuesday to consider betting on the USD/JPY rally s extending to the 125 area over the next few weeks, where they also suggested clients book profit on the trade.

“One thing to watch in the USDJPY is the pushback from policymakers in Japan. I’m not sure we’re there yet, but the 123.50/125.00 level will almost certainly attract attention,” Brent said. Donnelly, president of Spectra Markets and seasoned forex trader.

GBP to JPY Weekly

Above: GBP/JPY displayed at weekly intervals with Fibonacci retracements of the 2016 drop indicating likely areas of technical resistance for a fresh rally.

“Remember: it was Kuroda’s comments on the yen weakness at 125.00 that marked the end of Abenomics trading in 2015 and that 123.65/125.85 area is huge. Some people were calling 125, 00 “the Kuroda line” at the time,” Donnelly of Spectra Markets also said Thursday.

Many analysts and other market watchers have been revisiting the 125 level in USD/JPY since breaking above a key technical resistance level just above 120 on the charts earlier this week, although most between them have also expressed their reluctance to chase the exchange rate further. 125.

This is partly because officials have previously expressed concern about the yen falling below this level, leading some parts of the market to suspect that the risk of government intervention would increase if the rate exchange rate increased beyond this level.

This psychology and the resulting profit taking by speculative traders could potentially be enough to halt the USD/JPY rally itself over the coming days and weeks, although in the meantime the uptrend in the rate of The dollar exchange also portends further gains for the GBP. /JPY.

GBP/JPY tends to closely mirror the relative performance of the British pound and the yen when each is measured against the dollar, and would likely rise with USD/JPY unless, in the meantime, the main exchange rate of the pound sterling GBP/USD also suffers losses equivalent to those of the yen.