10:49, 26 July

Daily Analysis

Even though it has rallied in the last week, the USDJPY has moved considerably lower in the last four months falling from above 112 down to a 2019 low below 107 several weeks ago. In the last two months it has generally traded in a narrow range between 108 and 109 with an excursion below to set the low for 2019. In the second half of May, it was enjoying some support from around 109 and trading back and forth between 109 and 110.50, before dropping through the support at 109 and moving lower.
It has been mentioned previously that the 109 level remains a key level and was likely to play a role should the USDJPY continue to rally higher, which it has done in the last few weeks repelling prices.

Throughout May the USDJPY fell lower from another key level of 112 after the currency pair met resistance there for a couple of weeks and was unable to push through. It was able to push up to its highest level this year at 112.40 before being sold off and returning to the support at 109. To start the year it generally traded within a well established range between 110 and 112 receiving support and resistance from those levels respectively.

Despite it being some distance away, the 112 level remains very significant as it provided support to the currency pair in the last few months of 2018 whilst offering strong resistance in the period since. Throughout this year the USDJPY has done well to rally higher from a significant drop at the start of the year which saw it plummet to below 103, from where it then steadily climbed higher to the 112 level.

Several weeks ago the Bank of Japan (BOJ) kept monetary policy steady but Governor Haruhiko Kuroda indicated a readiness to increase stimulus as global risks overshadow the economic outlook, joining U.S. and European central banks in dropping hints of additional easing.  Governor Kuroda said the central bank could combine bigger asset buying with interest rate cuts if needed to keep the economy on track to achieve the 2% inflation target.  Since then, the BOJ Deputy Governor Masayoshi Amamiya has said the central bank is ready to ramp up stimulus and will consider all policy options if the loss of economic momentum hurts its efforts to boost inflation.  Only last week, BOJ governor Haruhiko Kuroda said the central bank won't hesitate to act if the economy slows.  However, there are now concerns of a strengthening yen, which is generally one of the main catalysts for the BOJ to cut rates. Easing from the Fed would boost the yen, which in turn may lead to a BOJ cut.  The problem is that the Fed has way more room to cut rates than the BOJ and therefore Japan’s central bank would be unable to prevent the yield differential from narrowing by simply lowering its own rates.  It would be starting a rate-cut competition that it can never win.