By Mike Ber

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USD/JPY: One way traffic from 93 to 98.

The Japanese stock market rallied more than 40% since November 2012, when prime minister Shinzo Abe mentioned for the first time his intentions to set inflation target at 2%. After that we’ve heard multiple times from Japanese government officials that they will do whatever it takes to reach inflation goal. The highly anticipated BOJ meeting took place on April 3-4. Market participants feared new BOJ Governor Haruhiko Kuroda might not live up to expectations, but USD/JPY made a new high after the new measures were announced closing at 97.76 for a week.

What’s next for USD/JPY?

We recommended to our members to buy USD/JPY within 92.455 -93.67 range before the BOJ meeting. Our average entry price was 92.65. We took some profits at 94.22, and closed our position completely at 96.212. It appears that we closed our longs premature, but we had to do that based on technical indicators. The pair looks extremely overbought, and in 8 out of 10 cases stocks retreat after such one-sided move. In any case, we won’t recommend shorting this pair at any level.

We’ve changed our bias to Neutral from Bullish-Neutral. The reason is simple – we want to see how the pair will digest the recent upside moves during the next few trading sessions. If you are still in this trade and didn’t close it like we did, we added the next upside target to take profits: 99.63.

USD/JPY is trading within the 96.51 – 99.63 range.

UJ(2)

While it’s obvious that the recent upward moves are not sustainable at this pace, we have to see how the pair will react at important resistance levels. Most of the retail traders position themselves to enter long positions on small dips. It was expected by many for USD/JPY to reach the level of 100, and this figure is very close and may become problematic to overcome in the short term.

It seems that nothing can stop the Yen from falling in the long term. We will discuss below the factors that can slow down the USD/JPY rally in the short and medium term:

1. One sided sentiment.
The problem is that everyone, and I mean everyone is shorting yen. You won’t find many retail traders and institutions publicly discussing to short USD/JPY. Usually the masses are wrong, sometimes they are right, but market will never make it easy for the masses to make money easily. The easiest trade right now is to buy USD/JPY and wait for it to reach 110 and 125, but it’s highly unlikely that it will be a straight line from here.

2. Stock market pullback
Many waiting for markets to pull back for weeks. The worry about market correction didn’t materialize, and stock prices didn’t see any significant drop. On Friday markets rebounded from the lows after softer than expected NFP report. The important question is whether the markets will be able to bounce back the same way from similar sell-offs in the future. The long-awaited pullback in general markets will affect the USD/JPY rally.

3. Currency war talk
Chinese economists warned over the weekend that devaluations carried out by Bank of Japan will hurt economies in the region, and the strong retaliation is required to keep Chinese economy competitive. The South China Morning Post reports: “The massive monetary stimulus by the Japanese central bank could spell doom for other nations in the region,” said Tsinghua’s Li, a former adviser to the People’s Bank of China. Other nations may follow suit and apply verbal pressure at the beginning, leading to central bank actions in the future.

4. Profit Taking
USD/JPY could retreat significantly on simple profit taking. Japanese government officials did a very good job to devalue the currency by talking. Once the new easing measures finally announced the markets may need to adjust to a new reality – his euphoria about the weak yen may fade soon, simply because there will be no regular verbal catalyst we used to get from government officials on a daily basis.

5. Disappointment with BOJ
Even though the latest measures by BOJ called revolutionary by many, the history shows that BOJ’s attempts failed miserably in the past. The problem with BOJ is that they already did something similar many times. Reuters provides details about BOJ attempts to ease in the past between 1999 and 2012.

Oct 2012 Boosts asset buying and lending scheme by 11 trln to 91 trln yen
Sep 2012 Boosts asset buying and lending scheme by 10 trln to 80 trln yen
Jul 2012 Boosts asset buying and lending scheme by 5 trln to 70 trln yen
Apr 2012 Boosts asset buying and lending scheme by 5 trln to 65 trln yen
Feb 2012 Boosts asset buying and lending scheme to 65 trln yen
Oct 2011 Raises asset buying and lending scheme to 55 trln yen
Aug 2011 Ups asset buying and lending scheme to 50 trln yen
Mar 2011 Hikes asset buying and lending scheme to 40 trln yen
Oct 2010 Sets up 35-trln yen asset buying and lending programme
Cuts overnight call rate to 0-0.10 pct
Pledges to keep zero rates until prices stabilize

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