USD/JPY hit 110.66, the lowest level since Oct. 31, 2014 – the historic day, when the BOJ surprised the market and immensely boosted monetary stimulus. The large weekly bearish candle is a sign of a building bearish pressure as the consolidation has ended.
The pair took a blow from two sides. Firstly, Japanese central bank didn’t ease policy and, secondly, the US Federal Reserve sounded more dovish than expected. There is speculation that Japan’s Prime Minister Shinzo Abe may delay a planned tax hike next year. Such step represents a form of fiscal stimulus and may diminish expectations of more actions from the Bank of Japan even further. Demand for the yen should be also solid as Japanese companies will repatriate their dollar earnings and buy the national currency as Japan’s fiscal year ends on March 31.
Traders will expect some action from the Bank of Japan if 110 mark is reached. There was already talk that the central bank asked dealers about the recent movements in the yen’s exchange rate. However, it’s only a month after G20 meeting, where Japan promised not to devalue the currency in order to gain competitive advantage. So, real interventions will be difficult for Japan. Moreover, the regulator might want to keep such extreme measures for later.
Yet, the idea of possible intervention will make traders nervous and this will increase volatility. Note that Japanese authorities could try verbal interventions, but their effect should be limited. On Monday there will be a bank holiday in Japan, so beware of the market swings in the conditions of low liquidity. Pay attention to Japanese inflation figures on Friday. There will be no data from China in the week ahead to weight on risk sentiment, and this could help the pair a bit. Yet, the main risk is still a decline to 110.00. Resistance is at 112.30 and 113.00.