FX Trading Idea – USD/JPY

Strategy

Buy USD/JPY at 131.00 for 137.00. Stop at 128.50. Time duration expected 2-3 months

Technical View

Price has reached a low of 129.50 on 3^rd January 2023 and this low was accompanied by a divergence warning from the MACD indicator. In fact the MACD indicator has been warning with divergences of a possible price low for some time now and this could be the moment for price to finally do a correction rally higher. The decline is also coming into a strong support area. Fibonacci 62% of the rally is close to the low and is a support for price. There were supports around this area, which is now turning into supports for price. Stochastic indicator is near to the oversold zone but is moving higher, hinting at a possible price rally ahead. However, 20EMA is bearish and is capping a price rally at the moment.

Fundamental View

Current interest rate differential is in the U.S. dollar favour. This is likely to keep the U.S. dollar strong against the yen. The yen had strengthened in the last month of 2022 on the ground that the Bank of Japan was about to ditch its ultra-loose monetary policy but after 1 month, Japanese interest rate is still at zero percent. With an interest rate differential of 4.5%, the U.S. dollar is likely to gain against the yen. The Fed is also expected to hike rate at the beginning of February, albeit at a slower and smaller quantum, which is likely to keep the US dollar strong against the yen.

While a change of BOJ governor is keeping the yen strong on expectation of a hawkish governor, the uncertainty is also keeping the yen weak, at least until a new hawkish governor is chosen to lead the Japanese central bank.

Risk sentiment is improving with China re-opening its border and easing its COVID restrictions. Easing of COVID restrictions is likely to improve the global economies, weighing on the Japanese yen with its safe haven status. Re-opening of China and travel is likely to send more Chinese tourists aboard, helping the global economy. An improvement of the global economy is likely to weigh on the safe haven Japanese yen.