Yen Poised for More Gains Warn the Charts
- Yen has risen to important technical levels
- It is showing potential for a further move higher
- Speculation is building the BOJ may tighten policy at their next meeting
The Japanese Yen has risen to a technical 'make-or-break' level against several counterparts amidst speculation of a change in Bank of Japan (BoJ) monetary policy.
The fundamental and technical changes could indicate more upside for the currency, although a clear break is required for confirmation.
The BoJ has hinted it could start to unwind its ultra loose monetary policy when it meets next meeting and this has led to a sudden fall in Japanese bond prices and a surge in yields. BoJ policy involves the Bank in buying bonds en masse to help inject liquidity and stimulate growth.
If the BoJ actually went ahead and altered their monetary policy, bonds would carry on falling in price due to the fall-off in demand but there would be other side-effects too, which could drive up the Yen more directly.
The lack of return offered by Japanese bonds has driven foreign investors to seek alternatives overseas.
"The BoJ’s negative interest-rate policy, followed by its yield-curve control program in September 2016, has prompted Japanese investors to seek returns from overseas debt," says Masaki Kondo, a correspondent at Bloomberg News.
"Higher domestic yields could see a part of this money return home, especially as currency-hedging costs for dollar investments remain high," adds Kondo.
Clearly, a rise in inflows would have a positive impact on the Yen via increased demand.
From a technical standpoint, the Yen is potentially poised to make further gains.
The EUR/JPY pair has fallen to a major trendline at the current 129.41 lows thanks to the Yen's recent bout of strength and if it manages to break clearly below that line, and the 50-day MA not far below, then it will probably open up a much more bearish continuation lower.
Momentum is bearish after falling to the same level it was at the end of June when it was in the 127s, suggesting a downside bias.
USD/JPY is showing a similar technical picture after having fallen to a trendline at about 110.95 (current market level 110.84). If the exchange rate successfully breaks below the trendline it will open up a new more bearish phase for the pair.
Both the 50 and 200-day MAs are situated below the trendline and could provide support for the exchange rate even if it breaks below the trendline. Major MAs act as obstacles and are often the location for complete reversals of the trend. We would, therefore, want to see a clear break below the MAs for greater confirmation of further downside.
Much like EUR/JPY, momentum is bearish after falling to the same level it was at the end of May when the exchange rate was actually lower at 108, which indicates strong downside momentum and a marginally bearish bias.
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