The USD/JPY pair tried to settle in the 134th figure area, continuing the corrective recovery after a sharp 700-point decline last week. The yen is losing ground amid a decline in anti-risk sentiment in the market, as well as due to the dovish comments from the head of the Bank of Japan. By the way, representatives of the Japanese central bank and the Japanese government are active (in the context of communication with the press) even now, a few days before the New Year. As a result, traders can work with at least some kind of information, while traders of other dollar pairs are forced to focus only on the well-being of the greenback, which now reacts mainly to external fundamental factors (for example, the easing of the "zero-Covid" policy in China).
The yen, in turn, is stewing in its own juice for the first time in a long time – it reacts primarily to domestic policy, domestic fundamental factors, while the dollar has receded into the background. Such changes in the table of ranks are in some sense revolutionary, since the Japanese currency has followed the greenback for many years, which determined the vector of movement of the pair.
As you know, the BOJ is a firm supporter of the accommodative policy, which it has been implementing with persistence for many years. Even in 2022, when all the world's largest central banks embarked on the path of raising rates, the BOJ remained true to itself. The Japanese central bank continued to pursue an ultra-loose monetary policy, keeping rates below zero, continuing to limit the growth in the yield of 10-year government bonds to 0.25% and voicing an appropriate stance, the essence of which was the central bank's readiness to further soften the conditions of the monetary policy.
And yet, at the end of autumn, some representatives of the BOJ began to hint at possible hawkish decisions. To be more precise, they assumed such a probability, referring to the unacceptably high level of inflation in the country. However, the hints were too obscure, without any specifics in the "if –then" format.
Actually, this circumstance was the reason why the market reacted in a certain way when the BOJ announced its decision to expand the yield range of government bonds (the band was expanded from +/- 25 points to +/- 50). The pair dropped sharply by 700 points, to the 130th figure, moving further away from the annual high of 151.96.
It is likely that the bears, after a short respite, would have continued their downward march, eventually appearing in the area of 127-128 figures. But the changed fundamental background did not contribute to the development of the bearish trend. Firstly, the market actually closed the year last week: liquidity has decreased, traders are being careful not to risk opening large positions against/in favor of the dollar. Secondly, risk appetite has increased in the market as it receives news from China, where quarantine restrictions for tourists have been eased (despite the increase in Covid cases in the country). And, thirdly, the bulls received some help from BOJ Governor Haruhiko Kuroda who said that the expansion of the yield range "is not a step towards exiting easy policy."
All these fundamental factors allow the pair to slowly recover its positions, although the upward dynamics is accompanied by downward pullbacks. For example, traders tested the resistance level of 134.30 (the Tenkan-sen line on the daily chart) on Wednesday, but then retreated to the middle of the 133rd figure.
In my opinion, the current price growth is temporary and, so to speak, pre-holiday in nature. Interest in risk and (especially) the news flow from China cannot serve as the main reason for a large-scale price recovery. If we talk about Kuroda's dovish position, then this fundamental factor can also be considered temporary – given the fact that in the spring of 2023, the current head of the BOJ is guaranteed to leave his post.
But Kuroda's possible successors are voicing rather hawkish messages. For example, former Deputy Minister of Finance for International Affairs Takehiko Nakao (who is a potential contender for the post of the new head of the BOJ) in an interview with Reuters said that he supports a smooth departure from the ultra-loose monetary policy. He noted that the side effects of the current policy "have become more significant". At the same time, Nakao expressed confidence that the current policy framework "will have to be changed sooner or later".
Another contender for the position, Professor Takatoshi Ito of the National Graduate Institute for Policy Studies in Tokyo, also voiced far from dovish messages. Commenting on the BOJ's high-profile decision, he said that a change in the central bank's policy on yield curve control "may be the first step toward an exit from its decade-long aggressive monetary easing".
Thus, in my opinion, the pair will show a sluggish ascending movement in the coming week (i.e. within the pre-holiday and post-holiday period), amid low liquidity and a thin market.
We can talk about longs here only in the context of a possible ceiling around 134.50-135.00. But if we consider wider time periods, then in my opinion, short positions with bearish targets at 132.00, 131.25 (the bottom line of the indicator Bollinger Bands on the daily chart) and 130.60 (annual low) are still of greater importance.
