Yen Bulls Warming Up

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 |  Includes: FXY, UDN, UUP
by: FXstreet

The day has finally come. The two-day BoJ monetary policy meeting has started, grabbing investors' full attention at the beginning of the trading week. It is worth noting what the central bank will look into: doubling its 1.0% inflation target to 2.0%, expanding its balance sheet by ¥10 trillion and the likelihood of lowering the interest rate paid on excess reserves below the actual 0.10%.

… Sell the fact?

Much of the recent yen weakness has been the pricing in of the factors mentioned above, although in the most likely scenario that the BoJ delivers, the door is wide open for a sharp appreciation of the Japanese yen, where investors would consider locking in profits. However, the extension of such a knee jerk push in USD/JPY would be put to a test, as the risk-on mode is still on, with market participants quickly unwinding long positions in safe havens, helped by the seemingly better eurozone prospects, according to ECB's Mario Draghi. In this case, the psychological hurdle at 90.00 would prove to be a tough barrier, ahead of other key resistance levels lying at 95.00 and 100.00.

Nonetheless, we all know that markets work in anticipation, and unless traders are really surprised by tomorrow's final announcements by the BoJ, a yen sell-off might well follow. Such a move may gather momentum due to the continuation of the U.S. debt ceiling and 'fiscal cliff' debate. In addition, and against a backdrop of swelling risk aversion, an intensification of the USD/JPY decline would be expected, fueled by oversold levels of JPY.

In the medium term, the BoJ would remain closely watched by investors, as incumbent governor Masaaki Shirakawa completes his term in April, and doubts yet persist on the potential successor. Moreover, the capacity of the central bank to fulfill expectations of higher inflation would be a key issue in avoiding further yen appreciation.

In the technical space, Valeria Bednarik, independent analyst at FXstreet.com, comments,

…the USD/JPY maintains its bullish tone, despite the hourly chart shows indicators mostly flat, with a neutral stance. In the hourly chart, 200 SMA approaches fast to 100 one, reflecting [the] latest consolidating stage, yet still the downside seems limited and pullbacks should be understood as buying opportunities, with 89.40/60 area now attracting buyers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.