Short USD/JPY – Rising Rate Cut Expectations and FX Intervention by the BoJ


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I am sticking with my short trade idea from Q4 2023. Although my Q4 idea paid off handsomely in the end, I still see massive scope for another push lower on USD/JPY in the new year. I would suggest reading the Q4 top trade idea as well for further insights.

USD/JPY held the high ground for the first half of Q4 2023 before finally declining from near the 2022 highs. The selloff gained traction following growing chatter toward the end of November regarding a policy shift from the BoJ, something which I personally shot down and was proven right following the BoJ meeting on December 19. The BoJ stuck to its current monetary policy since as I believed they would.

In Q1 of 2024 I fully expect these expectations to grow despite what the BoJ said at the December meeting. The BoJ Governor Kazuo Ueda I believe is working diligently and will eventually deliver the shift in monetary policy that the market expects. Even if this does not come to fruition in Q1 I still think market expectations and the BoJ to keep USD/JPY on the back foot. A key metric to monitor in Q1 will be wage growth as Governor Ueda has emphasized on numerous occasions. Sustainable wage growth above inflation is likely to be the precursor for a shift in policy and potential market expectations for a shift in policy.

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The US Federal Reserve on the other hand have already stated that they expect 75bps of rate cuts in 2024. The timing of these however is what is driving market moves at the moment and is likely to continue with each high-impact data release out of the US. I do think inflation will come down or remain close to current levels with the main risk being a geopolitical one which could once again dent supply chains. This could lead to stubborn inflationary pressure and thus delay rate cuts from the Fed in 2024 and thus provide the US Dollar with some form of support. Overall though I’m leaning toward continued USD weakness in Q1 which is likely to work in the favour of my short trade idea on USDJPY.

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Change in

Longs

Shorts

OI

Daily
8%
6%
7%

Weekly
3%
-1%
1%

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USD/JPY Technical Analysis

Looking at the technical picture, we are currently pushing higher following the recent selloff and currently trades between a key support and resistance levels resting at 142.00 and 145.00 respectively. Given the stark selloff since the highs just shy of the 152.00 handle, I would ideally prefer a deeper pullback before looking for potential short opportunities.

USD/JPY Weekly Chart

Source: TradingView, Prepared by Zain Vawda

Zooming in on the daily chart, I will break down a few key areas I will focus on for potential shorts. I will be watching the 146.50 area as a potential area for shorts but the area that would potentially provide a better risk-to-reward opportunity is likely to be a retest of the 50 and 100-day MAs.

Another sign that may be used to potentially pull the trigger would be a potential death cross pattern as the 50-day MA looks to cross below the 100-day MA. If USDJPY pushes beyond these levels, then the 150.00 level will be of interest and the only thing that would invalidate my bias at this stage would be a break above the previous highs at the 152.00 handle.

USD/JPY Daily Chart

Source: TradingView, Prepared by Zain Vawda

Support Levels:

142.00140.00 (psychological level)138.70135.00

Resistance Levels:

146.50147.50150.00 (psychological level)152.00 (2022 high)

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