- BOJ Dep. Gov. Uchida’s speech gives a proverbial “green light” to carry traders to resume shorting the yen and buying higher-yielding currencies and assets
- Ultimately, the key question for traders centers around whether the US and other developed economies are slipping into a recession or not.
- The technical bias in USD/JPY will remain on the upside as long as it remains above the 146.00 level.
“Modern” central banks have been around for more than a century, and they’ve made most of the big mistakes over that period. Taking just the Federal Reserve, US central bankers have shot themselves in the foot numerous times, from Fed Chairman Roy Young raising interest rates into the teeth of the Great Depression to Arthur Burns prematurely cutting interest rates and sparking another wave of inflation in the 1970s.
Having (mostly) learned from their mistakes, central bankers now make much smaller mistakes, but ones that can have a big impact on markets. In my view, we just saw such a mistake from BOJ Deputy Governor Shinichi Uchida overnight. In a speech during today’s Asian session, Uchida stated outright that the central bank “won’t raise rates when markets are unstable” and that Japan’s monetary “policy path will obviously change if market volatility view on risks change.”
While he later tried to walk it back slightly, Uchida’s speech gives a proverbial “green light” to carry traders to resume shorting the yen and buying higher-yielding currencies and assets. Not surprisingly, traders have reined in their expectations for BOJ tightening this year, and are now pricing in only an outside chance of any additional interest rate increases from the central bank this year.
While not an egregious error per se, Uchida’s comments undermine the BOJ’s months-long attempt to boost the yen and tighten monetary policy. That said, Japan is merely one side of the carry trade and with other developed economies showing signs of slowing substantially in the second half of the year, central banks like the Fed and BOE are still likely to cut interest rates aggressively in the coming months, curtailing the upside potential of carry trades regardless of what the BOJ does.
Ultimately, the key question for traders centers around whether the US and other developed economies are slipping into a recession or not, and the answer to that question will determine the price action in the FX, bond, and stock markets over the rest of 2024 and beyond.
Japanese Yen Technical Analysis – USD/JPY Daily Chart
Source: TradingView, StoneX
Technically speaking, there is some early evidence that USD/JPY may have carved out a bottom this week. As the daily chart above shows, USD/JPY is showing a modified “morning star” candlestick formation; for the uninitiated, a morning star candle formation is a relatively rare candlestick formation created by a long bearish candle, followed by a small-bodied candle near the low of the first candle, and completed by a long-bodied bullish candle. It represents a transition from selling to buying pressure and foreshadows more strength to come.
For the rest of this week, the key levels to watch will be near-term resistance at 148.80 and intraday support at 146.00. On a short-term basis, the bias in USD/JPY will remain to the upside as long as it remains above the 146.00 level, encouraging traders to re-establish some of their previous carry trades now that the risk of the BOJ raising interest rates has been mitigated.