The USDJPY pair is currently stabilizing near an important resistance level as the Japanese upper house election approaches. This week, the US dollar displayed mixed results following the release of US inflation data, with Core CPI and Core PPI not meeting expectations. The dollar performed better against commodity currencies than against the EUR and GBP. Following the CPI data, traders are adjusting their positions carefully. In Japan, the key fundamentals remain unchanged. Attention is focused on US-Japan trade talks, with the Bank of Japan watching closely. They believe a positive outcome in these negotiations could strengthen the yen. The crucial period is from July 20 to August 1, which includes the election and the deadline for a trade deal with Trump. If the ruling bloc wins a majority in the election, the yen may appreciate.

Technical Analysis

From a technical perspective, the daily chart shows USDJPY around the significant 148.30 resistance level. Buyers are aiming for a rise to 151.20, while sellers need a drop below 148.30 to push their bets down to 142.35. The 4-hour chart shows a bullish trend, indicating favorable movement for buyers. Traders on the 1-hour chart seek setups that align with this behavior. Upcoming events include the University of Michigan Consumer Sentiment survey and the Japanese elections. The consolidation near this key resistance has broken, with the pair now trading at multi-decade highs. This surge is mainly due to the growing interest rate gap between a strong US Federal Reserve and a still-dovish Bank of Japan. Derivative traders should see any dips as buying opportunities rather than signs of a trend change, driven by the appealing carry trade. The situation regarding US inflation data is still significant. Recent US CPI figures for April 2024 showed an annual rate of 3.4%, well above the central bank’s target. This increases expectations that US rates will remain high for an extended period, keeping the dollar robust against the low-yielding yen. In Japan, the scenario has shifted from speculation to action as the central bank ended its negative interest rate policy in March 2024. Yet, with their policy rate still near zero, this change was mostly symbolic and did little to narrow the yield gap with the United States. Any further rate hikes will likely be announced in advance and probably won’t be aggressive enough to change the main trend.

Market Strategy

The “crowded trade” idea is more relevant than ever. Recent data from the CFTC shows that speculative net long positions in the dollar against the yen are close to historic highs. The main risk now isn’t a shift from central banks, but direct currency intervention, as seen in late April and early May 2024, when authorities likely spent over ¥9 trillion to protect their currency. Thus, traders holding long positions should brace for sudden drops caused by official actions. Given the high risk of intervention, buying out-of-the-money USD/JPY put options is a sensible way to hedge long positions. This strategy offers protection from sharp declines while still allowing for gains if the carry trade remains strong. The elevated implied volatility reflects the market’s awareness of this risk. Looking back at interventions in 2022, we saw that official actions could lead to temporary sharp reversals of 5-7% in the pair. However, the upward trend eventually resumed as the interest rate differential took charge again. This implies that while we must respect the risk of intervention, the general bullish outlook for the pair stays strong as long as the policy gap remains wide. Create your live VT Markets account and start trading now.

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