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2 reasons why the JPY weakness is not over

By:
on Nov 9, 2022
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  • Demand from Japan for non-Japanese bonds has fallen significantly, but the Bank of Japan keeps easing
  • USD/JPY consolidates in a 4th wave that should take a few more months
  • Buyers should emerge on any move towards 140

While the trading year is not over yet, one can say that the biggest moves in the currency market in 2022 belonged to the JPY pairs. In particular, the USD/JPY exploded higher this year, triggering multiple stops and rallying until the Bank of Japan intervened.

The rally was even more surprising given the timing of its start. Russia invaded Ukraine in February this year, and the JPY acted as a safe haven until then.

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But suddenly, it did not.

Not only did the JPY not strengthen, but a major bearish trend began. It all had to do with the divergence in the monetary policies of the two central banks – the Bank of Japan and the Federal Reserve of the United States.

On the one hand, the Fed embarked on an aggressive tightening cycle to fight high inflation. But on the other hand, the Bank of Japan kept the easy policy intact.

As a result, the yen plummeted, especially against the US dollar. The USD/JPY exchange rate climbed from below 116 to above 150.

In between, the Bank of Japan intervened – twice. Once at 145 and once above 150.

To do so, it sold US dollars and bought JPY. As such, demand from Japan for US Treasuries has fallen significantly, as seen by the sharp decline in net purchases of non-Japanese bonds by Japanese life insurers and pensions.

It shows the length the Ministry of Finance is willing to go, but the Bank of Japan did not change course. As such, the JPY weakness will likely continue after a consolidation unless the Bank of Japan changes its monetary policy.

Also, historically speaking, interventions in the FX market do not work. Does anyone remember the EUR/CHF 1.20 peg that almost broke the Swiss National Bank?

Impulsive wave of a larger degree is incomplete

Another reason why the USD/JPY rally is not over comes from a running correction on the daily chart. While the five-wave structure is over, it only completed the 3rd wave of a larger degree.

USD/JPY chart by TradingView

Sure enough, more consolidation lies ahead. However, on any move below or around 140, USD/JPY buyers should emerge. By the time the price action reaches the lower edge of the rising channel, the 5th should unfold, and it must exceed the end of the 3rd wave in blue.

Summing up, USD/JPY is a buy on the move towards 140, especially by the time it reaches the lower edge of the rising channel (around March next year). As such, we should see another rally above 150, whether the Bank of Japan likes it or not.