As traders are pricing more and more rate hikes and aggressive tightening by the Fed, the USDJPY pair continues in its, so far uninterrupted, march toward the psychological 130 threshold.
That would be the highest level for the USDJPY pair since May 2002!
The USDJPY pair continues to benefit from the massive divergence between the respective monetary policies. Recently, St. Louis Fed President Bullard stated that the Fed should not rule out raising rates by 75bps, but it is not his base case here. Instead, he believes the Fed needs to move quickly to raise its key policy rate to around 3.50% this year.
On the other hand, the Bank of Japan Governor Kuroda reiterated that a weak yen is still positive for Japan’s economy. Also, there was no indication that the BoJ was ready to tighten policy anytime soon to provide more support for the yen.
Therefore, despite the obvious overbought conditions, the pair has not shown any exhaustion so far, with investors likely targeting the 130 level in the following days.
Big banks remain bullish
Economists at ING expect the pair to test 130.00 in the coming days. “USD/JPY may soon touch 130, but FX intervention is not assured. No intervention at the 130.00 mark could mean that the line in the sand is set at 140.00.”
Economists at Commerzbank roughly share a similar idea. They think that the bar for FX interventions is very, very high. “I think that for the time being, the MoF and BoJ will try ‘verbal’ interventions and will sound continuously more concerned about the yen-weakness. In the hope that the market will end the yen collapse for fear of interventions. In poker, I suppose one would call that ‘bluffing.’”
“The latest IMM report highlights clearly that speculative yen selling has been ramped up in anticipation of further weakness.” Economists at MUFG Bank expect the pair to near the 130 level.
To conclude, should the Fed continue on the current path of monetary policy tightening, it could boost the USDJPY pair further. However, we will likely see a correction due to the overbought conditions.
Daily chart overextended
The scope of the bullish movement is really massive when looking at the daily chart. It really looks like we will see the 130 level this week. As long as the USD trades above previous highs of 124.30/125, the medium and long-term outlooks seem bullish.