What could change the trend in USDJPY?

Read full post at forexlive.com

The Japanese MOF eventually intervened on Monday as the USDJPY exchanged rate crossed the 160.00 handle. The pair fell for 500 pips before bouncing on the 155.00 handle and some key levels as the bulls bought the dip. The problem here is that central bank intervention doesn’t work unless the fundamentals change. The impact is generally short term and the market fades the move by buying/selling at even better levels.

On the 4-hour chart, we can see that the 160.00 handle is now clearly the line in the sand. The pair bounced around the 155.00 handle where we had the most recent swing low level and a trendline. All else being equal, it’s very likely that we will see the pair rising back into the 160.00 handle where we could see a rejection as some profit taking amid fears of another intervention might lead to a pullback.

On the 1-hour chart, we can see that we had a resistance zone around the 157.00 handle but the hot US Q1 ECI triggered a breakout with more buyers piling in afterwards. There are talks that the Japanese can change the current situation if the BoJ were to surprise with a rate hike. I don’t see why they would risk to endanger the progress on wage growth and inflation just to have a limited gain. From a risk management perspective, it doesn’t look like a good strategy.

This brings us to the only way the trend could reverse: the US data deteriorates and the market prices back in three or more rate cuts. A lot of the hawkishness is already priced in, but the pair continues to move up as the carry trade remains great. A contrarian here will look at the record short positions in the Yen and wait for the right catalyst to pile in. At the moment, we don’t have any of that. Yes, there are signs of weakness in some soft data but the hard data continues to surprise to the upside. The market will want to see some confirmation from the hard data or huge downside surprises in things like the ISM PMIs before reversing the trend.