The Bank of Japan probably intervened in the Forex markets yesterday and a big rally in the JPY unfolded after weak US CPI data but can the rally be sustained and what could the Bank of Japan do going forward – Our view of the pair below...

Earlier in the week we posted an article on the possibility of a fall in USD/JPY for the background to why we thought a rally might occur you can view the article here.

We were also looking for a rally in the crosses and analyzed NZD/JPY you can view the article here.

Bank of Japan Intervene to Push the JPY Higher

Many in the markets are speculating if the Japanese authorities did intervene to prop up the Yen but in terms of the Japanese authorities Japan’s currency chief retained his strategy of keeping the market guessing over whether Tokyo used intervention to push up the yen: "Our practice is not to say whether we have intervened or not,” said Masato Kanda, vice finance minister for international affairs. In our view, the authorities intervened due to the rapid move in the JPY...

"Just looking at the charts and listening to some of the chatter – seems pretty likely the MOF did intervene this morning after the CPI print. Vice Finance Minister Kanda with a typical refusal to answer to whether or not there was intervention, but the first leg down for the JPY was right at the CPI print after which it stabilized before the next larger leg lower about 10 minutes later." (GARRETT MELSON NATIXIS.)

"The MOF won't confirm this for some time but the extent of the move gives a strong impression that it has been active and taken advantage of the post-U.S. CPI data to take action." (CHRIS SCICLUNA DAIWA CAPITAL MARKETS.)

In terms of intervention if it occurred was probably co ordinated Japan's MOF was aware in advance that the US CPI print would be a miss on the forecast, and just minutes after the report it spent tens of billions worth in JPY buying which explains the 10-minute delay between the two legs lower.

The aim of intervention would be to hit "speculative" shorts and both the BOJ and MOF would have been given the green light to intervene at any time they wish to support the JPY and send it to the upside and after CPI data which came in below forecast was the ideal time.

With the BOJ expected to either taper its QE next month or to even hike interest rates, or both at the same time, it's unlikely the Japanese would not have spent many billions or so in FX reserves only to see the USDJPY go to new highs.

Can the Japanese Yen Move Higher?

Speculative positioning was excessive before CPI which we noted in our previous article and many stops have been hit but the speculative short will be near a record high in our view. The market will be wary of selling the JPY after yesterday's big move so we don't see a move back to new daily highs

Bank of Japan to Hike Rates

For a trend change to occur, we need to see the Bank of Japan raise rates and we think this will occur in the next couple of months. The Bank of Japan will be raising interest rates as other central banks are looking to cut and they look likely to reduce their bond buying and this action will come soon in our view.

With the Japanese Yen the most oversold major after decades of loose monetary policy, we see plenty of upside in USD/JPY and in the crosses.

Technical Analysis

Our view of the major support and resistance levels is below in terms of both the daily and monthly charts.