The Japanese MOF finally intervened on Monday when the USDJPY exchange rate crossed the 160.00 mark. The pair fell 500 pips before bouncing off the 155.00 handle and some key levels as bulls bought the dip. The problem here is that central bank intervention only works if fundamentals change. The impact is usually short-term and the market smoothes the move by buying/selling at even better levels.
USDJPY 4 hours
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 low and a trendline. All things being equal, it is very likely that we will see the pair move back towards the 160.00 area where we could see a rejection as some profit taking amid fears of further intervention could lead to a pullback .
USDJPY 1 hour
On the hourly chart we can see that we had a resistance area around the 157.00 handle, but the hot US ECI in the first quarter triggered a breakout with more buyers flocking in thereafter. There is talk that the Japanese could change the current situation if the BoJ surprises with a rate hike. I don’t see why they would risk jeopardizing progress on wage growth and inflation just to achieve a limited gain. From a risk management perspective, this doesn’t seem like a good strategy.
This brings us to the only way the trend could reverse: US data deteriorates and market prices retreat after three or more rate cuts. Much of the hawkishness is already priced in, but the pair continues to advance as the carry trade remains strong. A contrarian will look at the record short positions in the yen and wait for the right catalyst to appear. At the moment we don’t have any of that. Certainly, there are signs of weakness in some quantitative data, but the hard data continues to surprise on the upside. The market will want to see confirmation of hard data or huge downside surprises in things like the ISM PMI before reversing the trend.
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