USD/JPY Technical: Potential counter-trend rebound within medium-term downtrend

• Recent bizarre hawkish rhetoric from BoJ top officials ahead of Japan’s 2024 nationwide spring wage negotiations sparked a further rally in JPY.
• Increasing expectations of a BoJ pivot to scrap its decade-long plus of short-term negative interest rate policy to come as early as this month, 19 December monetary policy meeting.
• The interest rates swap market has priced in a 45% chance of removal of negative interest rate on 19 December, a jump from the 3.5% chance seen earlier this week.
• USD/JPY reached oversold condition as it tested the key 200-day moving average acting as a support now at 141.85/60.

This is a follow-up analysis of our prior report, “USD/JPY: Bearish momentum remains intact despite softer Tokyo CPI” published on 6 December 2023. Click here for a recap.

The price actions of the USD/JPY have plummeted and broken below 144.80 short-term support as highlighted in our previous report, which printed an intraday low of 141.62 in yesterday’s (7 December) US session.

JPY’s swift rally against the USD is an outlier

Fig 1: US dollar performance against major currencies as of 8 Dec 2023 (Source: Reuters, click to enlarge chart)

Yesterday’s swift tumble seen in the USD/JPY has made it an outlier in terms of its five-day rolling performance (see Fig 1) against other major US dollar pairs; the USD was the weakest against the JPY and USD/JPY recorded a daily loss of -2.14% yesterday, the steepest single-day decline since 12 January 2023.

The primary driver of this current bout of JPY strength has been attributed to the Bank of Japan’s (BoJ) key officials’ bizarre change of monetary policy rhetoric from a conservative “wait and see” approach to a slight “outlandish hawkish” guidance before the outcome of next year nationwide spring wage negotiations. As BoJ Governor Ueda has repeatedly stressed he needs to see a sustainable trend of wage increases to back demand-driven price increases in goods and services before BoJ can consider its options to exit the current decade-long plus of short-term negative interest rate policy.

Bizarre hawkish rhetoric from BoJ top officials ahead of Fed FOMC

Yesterday, BoJ Governor Ueda made a reply in parliament that BoJ would face a more challenging situation at the year-end and the start of 2024, citing that it had several options at hand on which interest rates to target once it moved short-term interest rates up from its current negative territory.

In addition, BoJ Deputy Governor Himino highlighted in his public speech yesterday that an exit from its current ultra-loose monetary policy would benefit the Japanese economy.

Therefore, the latest unusual hawkish rhetoric from BoJ’s top two officials ahead of the Fed’s monetary policy meeting and the release of its latest dot plot on 13 December have sounded the alarm bell that BoJ may start to pivot away from its short-term negative interest rate policy sooner than expected.

The interest rates swap market has indicated a significant jump in expectations of an approximate 45% chance that BoJ would end its negative interest rate policy on the 19 December monetary policy from just a mere chance of 3.5% before BoJ’s Ueda and Himino’s remarks.

Tested 200-day moving average with oversold conditions

Fig 2: USD/JPY medium-term trend as of 8 Dec 2023 (Source: TradingView, click to enlarge chart)

Fig 3: USD/JPY minor short-term trend as of 8 Dec 2023 (Source: TradingView, click to enlarge chart)

The break breakdown of the medium-term ascending channel support at 146.20/145.90 in place since the 24 March 2023 low has increased the odds that the short-term downtrend phase of the USD/JPY that kickstarted on 13 November 2023 has morphed into a potential medium-term downtrend phase.

In technical analysis speak, prices do not move in a vertical direction but instead oscillate within their trend phases that can evolve into counter-trend movements.

The swift intraday decline seen in USD/JPY has led it to retest the key 200-day moving average now acting as a support at 141.85/60

In addition, the daily RSI momentum indicator has reached an oversold condition while the shorter-term hourly RSI has flashed out a bullish divergence condition at its oversold region. These observations suggest that the current short-term impulsive down move from the 30 November 2013 minor swing high of 148.52 has hit an overextended condition where a potential minor counter-trend rebound may occur at this juncture within its ongoing medium-term downtrend.

Watch the 141.60 key short-term pivotal support with the intermediate short-term resistance zone coming in at 144.80/145.30 and 146.25/70 further out next if 145.30 surpasses.

However, a breakdown below 141.60 resumes the bearish tone to expose the next intermediate support at 139.20 (swing low area of 27/28 July 2023 & close to 50% Fibonacci retracement of the former medium-term uptrend phase from 16 January 2023 low to 13 November 2023 high).

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