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The Japanese yen is weak and vulnerable at least when paired with the US dollar. The USD/JPY pair has risen by 500 points for the last four months. If it was trading at the bottom of the 109.00 at the beginning of September, then now, buyers are attempting to consolidate above the level of 114.00. The upward dynamics of this instrument are due to both the strengthening of the dollar and the weakening of the yen, which has to reckon with the "dovish" position of the Bank of Japan. Sometimes, there are bursts of interest in the Japanese currency occur due to increased anti-risk sentiment in the market. However, we are talking here about the temporary growth of traders: the status of a protective asset alone will not go far. Therefore, the upward potential of the pair is not yet over. Buyers of USD/JPY pair will continue to try to return to the multi-year high (115.53) that was updated on Nov 23.
On the side of the US dollar are the Fed's hawkish position, rising Treasury yields, and the growth of key US macroeconomic indicators. As for the yen, we have the new strain of coronavirus, which continues to cause concern among many market participants. It was Omicron that "helped" the USD/JPY bears to completely turn the pair when it reached its multi-year peak. At the end of November, the pair literally collapsed by almost 250 points in a day, dropping from 115.40 to the base of 113.00. But, as mentioned above, such fundamental factors have a short-term impact – they are not able to hold traders for a long time.
Omicron really surprised the markets at the end of last month, significantly boosting anti-risk sentiment. The new mutant strain could easily return the world to the year 2020 if the most pessimistic assumptions of virologists were confirmed (a high degree of infectiousness, zero effectiveness of vaccines, severe disease, and high mortality). Fortunately, these assumptions were only partially confirmed. Preliminary findings state that Omicron is 4 times more infectious than Delta, but the likelihood of hospitalization is 11 times lower than with Delta. According to statistics, only one out of 60 patients is admitted to the hospital. In South Africa, where the new "modification" of the virus was actually discovered, a new rapid increase in the cases of COVID-19 began two weeks ago. But according to the results of the last two weeks, the number of hospitalizations in the country has sharply decreased. Only 1.5% of patients needed a hospital bed; whereas, during the previous COVID wave, when Delta was the dominant strain, 19% of those infected were hospitalized.
In view of such news, the yen significantly weakened its position. Buyers of USD/JPY took the lead and headed upwards again. The results of the last meeting of the Bank of Japan strengthened the position of buyers of USD /JPY: the regulator will maintain a soft monetary policy, only slightly correcting it (the Central Bank has reduced the program of purchases of corporate bonds and commercial securities). At the same time, the head of the Japanese Central Bank, Haruhiko Kuroda, said that the slowdown in the pace of purchases will begin approximately from April next year. At the same time, the small business lending program will be extended after its completion, that is, after March. Kuroda also said that the regulator is ready to take "additional relief measures" if necessary.
In other words, the members of the Bank of Japan's Governing Council maintained a cautious and wait-and-see attitude, assuring market participants that they would implement an ultra-soft policy. Several analysts said that the Japanese regulator will remain one of the most "dovish" central banks in the near future.
The yen cannot oppose itself to the US dollar against the background of the Fed's hawkish intentions, especially given the recent fundamental events in the US (good Nonfarm, record inflation growth, American consumer activity, Washington's calm reaction to Omicron, etc.). All this suggests that the upward trend for the USD/JPY pair is still in force.
The technical side of the issue also speaks in favor of the upward movement. On the daily chart, the pair is above the Kumo cloud of the Ichimoku indicator and above all its lines. The bullish signal "Parade of Lines" indicates the potential for further price growth. In addition, the pair is located between the middle and upper lines of the Bollinger Bands indicator. This also indicates the bullish mood of traders. The level of 114.70 can be considered as the nearest target of the upward movement – this is the resistance level corresponding to the upper line of the Bollinger Bands indicator on the D1 timeframe.
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