KAB foreign exchange trading reminder: USD/JPY refreshes more than 11-month high, approaching the 150 mark! Beware of "black swan" events

On Monday, the dollar/yen rose to 149.77 in Asia, refreshing its high since the end of October 2022 and approaching the important mark of 150. The Bank of Japan's summary of opinions shows that ending ultra-loose negative interest rates must be linked to the successful achievement of the 2% inflation target. The black swan event of turning to tightening may still play out, and Bank of Japan Governor Kazuo Ueda said he is not worried about the cost of phasing out stimulus measures.

On Monday (October 2), the dollar/yen rose to 149.77 in the Asian market, refreshing the high since the end of October 2022 and approaching the 150 important mark that is seen as Japan's intervention. The Bank of Japan's opinion summary shows that ending ultra-loose negative interest rates and staging a "black swan" event of turning to tightening must be linked to the successful achievement of the 2% inflation target. Bank of Japan Governor Kazuo Ueda said he was not worried about the cost of phasing out stimulus measures, and there was widespread speculation in the market that he would scrap the aggressive stimulus plan of his predecessor, Haruhiko Kuroda.

The Bank of Japan's September meeting opinion summary noted that one member said that although there is still some distance, Japan is close to achieving its price target, so the second half of this fiscal year will be a key stage in determining the price outlook for next year. The Bank of Japan's short-term survey shows that Japan's large manufacturers expect the dollar/yen exchange rate to average 133.91 in the 2023/24 fiscal year. The large non-manufacturing index improved for the sixth consecutive quarter, reaching its highest level since November 1991.

The Confidence Index of Japan's Large Manufacturers has improved for two consecutive quarters, reaching its highest level since June 2022. One member said there is a chance that wage growth next year will exceed this year's increase. One member said inflation may not slow down much and may exceed expectations, given the recent volatility in foreign exchange and oil prices; one member said there is no need for additional adjustments to yield curve control as long as long-term interest rates remain relatively stable.

One member said that ending the yield curve control (YCC) policy and negative interest rates must be linked to success in achieving the 2% inflation target; one member said that in order to achieve the price target sustainably, wage growth must be sustained and lead to service price-driven inflation. Japanese companies expect inflation to reach 2.5% in one year, 2.2% in three years and 2.1% in the next five years.

Profits would be squeezed when the BoJ raises interest rates because doing so would increase the rate it pays on reserves held by the Financial Institution Group at the central bank, Mr. Ueda said at an academic seminar on Saturday. But he said it could also earn higher interest income as its current holdings of government bonds are replaced by higher-yielding ones, adding that it was difficult to predict exactly how much future exits would affect the BoJ's finances.

"The objective of the central bank's monetary policy is to achieve price stability, which is the central bank's mandate stipulated by law, and considerations such as the central bank's finances do not prevent it from implementing necessary policies," Mr. Ueda said in a speech at the annual meeting of the Japan Monetary Economics Society. "As long as the central bank implements appropriate monetary policy, its ability to implement monetary policy will not be impaired by a temporary reduction in profits and capital," he said.

Under the yield curve control policy, the Bank of Japan has guided short-term interest rates at -0.1% and capped 10-year government bond yields at around 0% to reflate and keep inflation high near its 2% target. It has also maintained the large-scale asset purchase program it deployed in 2013.

Some academics have warned that the BoJ's huge balance sheet will expose it to huge losses, threatening its credibility and making it difficult to exit ultra-loose policy. Although inflation has been above 2 per cent for more than a year, Mr. Ueda said the BoJ must maintain ultra-loose monetary policy until the recent cost-driven inflation shifts to price rises driven by strong domestic demand and rising wages.

But he also said the BoJ would consider an exit when it consistently and steadily achieves its price target.

In the short term, the monetary policy divergence remains firmly skewed in favor of the dollar. Weak consumer confidence data in Japan support the Bank of Japan's ultra-loose monetary policy stance, however, slower wage growth in the United States and significantly weaker activity in the services sector will test the Fed's higher theory for longer.

Last week, the probability of a Fed rate hike in November fell from 27.5% to 18.3%. However, there is still uncertainty in December. According to CME's Fed Watch tool data, the probability of a Fed rate hike in December stands at 31.4%, down from 36.7% for the week. Sentiment towards Fed monetary policy could change significantly this week, with Wednesday's ISM non-manufacturing PMI data and Friday's U.S. non-farm payrolls report (NFP) having an impact.

USD/JPY technical analysis

FXEmpire analyst Bob Mason said that USD/JPY is still above the 50 and 200-day moving averages, indicating a bullish signal for the price. If the pair avoids falling to the support level of 148.405, the bulls may test the resistance level of 150.293. Disappointing short-term data and a hawkish Federal Reserve chair will be positive for USD/JPY.

However, a fall below 149 would support USD/JPY to rise to the support level of 148.405. The 14-day RSI stands at 66.39, indicating that USD/JPY could return to 150 before reaching the overbought zone.

Looking at the 4-hour chart, USD/JPY is hovering above the 50-day and 200-day moving averages, reiterating the bullish price signal. Avoiding a fall below the 50-day moving average will support USD/JPY to rise to the resistance level of 150.293.

However, a fall below the 50-day moving average for USD/JPY will bring support at 148.405 into play. The 14-4 hour RSI is at 62.33, indicating that USD/JPY will return to 150 before entering the overbought zone.