01.04.202414:20 Forex Analysis & Reviews: Will the yen cross the red line?

After the swift roller-coaster ride in the first two decades of March, USD/JPY froze in consolidation. The strength of the American economy and dollar, combined with expectations of an extremely slow normalization of the Bank of Japan's monetary policy, provide grounds for investors to continue buying the pair. However, when official Tokyo and major hedge funds stand on the other side of the barricade, one should think thrice before making a move.

The fact that the government rescheduled an emergency meeting with the Bank of Japan and the Financial Services Agency from April 4 to April 3 indicates deep concerns about the movement of the yen in the Forex market. While it was previously believed that specific levels of USD/JPY didn't concern official Tokyo, only rapid movements in the pair did, the opinion of investors has now changed.

Finance Minister Shunichi Suzuki and Finance Vice Minister for International Affairs Masato Kanda claim that the yen's movement does not correspond to fundamentals. Many were surprised by the rally of USD/JPY amidst a narrowing yield differential between American and Japanese bonds after the BoJ's decision to abandon negative interest rate policy. In reality, the gap in bond market rates remains significant, allowing traders to buy the U.S. dollar.

The situation may change in the second quarter. According to Bloomberg research, in April–June, the volume of bonds redeemed by the Bank of Japan will exceed the volume purchased as part of QE securities. While the deficit may be modest at $1.3 billion, trouble often comes in small packages.

Dynamics of the difference between repaid and purchased BoJ bonds

This circumstance increases the risks of rising yields of Japanese bonds, reducing the differential with American counterparts, and the decline of USD/JPY. Moreover, according to former official Tsutomu Watanabe, the Bank of Japan's next step towards monetary tightening will likely occur in October.

The longer consumer prices remain anchored, the higher the probability that the next decisive move on the overnight rate by Kazuo Ueda and his colleagues will occur sooner rather than later. In this regard, stabilization of the CPI at levels of 2.4-2.5% and core inflation in Tokyo nearing the 3% mark is good news for USD/JPY bears.

Inflation dynamics in Tokyo

Interestingly, it's not just the government and the Bank of Japan who are concerned about the weakening yen and see speculative traces in it. According to Bloomberg research, major players consider the level of 152 in USD/JPY as a sort of red line. Serious positions are concentrated here, and a breakthrough is likely to trigger a strong reaction from the pair. However, hedge funds are ready to fight tooth and nail for their money.

Technically, on the daily chart, USD/JPY is experiencing a short-term consolidation in the range of 151-151.9. Breaking above its upper boundary may lead to a continuation of the rally towards 153.4. However, if the resistance test proves unsuccessful, it makes sense to sell the U.S. dollar against the yen according to the false breakout model from 151.35 and 151.