USDJPY: No strong directional impetus from BoJ – TDS

Analysts at TD Securities think that today’s BoJ meeting outcome does not leave USDJPY with a strong directional impetus as the BoJ has strengthened its commitment to YCC and dashed hopes for a clearly hawkish shift.

Key Quotes

“At the same time, however, it has given itself more flexibility in how it reacts to changing circumstances going forward while adopting a wider range on rates before signaling it may step in to limit any deviation from its policy targets.”

“On balance, we think the JPY will take its cue from the rates market and trade on a moderately dovish footing. This should help keep USDJPY elevated for now as the area just above 110.50 appears to be a solid floor for the foreseeable future.”

“At the same time, however, we think spot may be challenged to rise to fresh highs for this cycle above 113 unless fresh catalysts emerge.”

“We would be concerned if USDJPY could not push – and hold – above 111.50 over the next day or two. Investors may need to see  what the FOMC says  and how the US employment data plays out before chasing a move in USDJPY.”

“An inability for JPY to sustain a softer tone in the wake of today’s BoJ meeting could be an ominous sign for JPY bears. The pain trade, in our view, appears to be lower in USDJPY. Indeed, we continue to target 104 as our year-end forecast for USDJPY.”

“Against this backdrop, we note that our HFFV estimate suggests that USDJPY should be trading closer to 110 and gradually rising. At the same time, investor positioning looks a little stretched, with leveraged accounts maintaining a net long USDJPY of about 26% of open interest – and increasing. This could help constrain a sharper adjustment higher, at least for the near term.

“We think a clear break above 111.50/55 could attract additional buying interest. The next target on the upside would be the 111.90/112.10 zone. Above this, we think decent resistance would emerge around 112.65/80 ahead of the 19 July cycle high of 113.17.”

“We do not think the BoJ was dovish enough to offset a notable deterioration in sentiment should one arise. Below 110.50/60, the next major support zone should come into play around the 109.20 area. This region has served as a key pivot in recent months and now broadly corresponds with the 100dma. Below this, and our attention would turn to a test of 108.10.”