We have been bullish of the JPY against the USD and also in the crosses in recent articles and the JPY has seen major upside but in the short term, we are overbought and now want to sell the JPY as we come into the Bank of Japan meeting...

Bank of Japan Meeting – Will they Raise Rates?

The Japanese Yen has seen a big rise to the upside as the market sees a dovish Fed and the Bank of Japan raising rates this week. The Bank of Japan holds its meeting on Wednesday and markets imply a 66% chance it will hike rates by 10 basis points to 0.2%, with some chance it could move by 15 basis points. but could they be disappointed?

“That hope may be dashed... as Inflation in the Tokyo area came in below economists' expectations again in July, with the core rate, as defined by the West, coming in at just 1.1%, the lowest level in about two years. Domestic inflationary pressures have yet to really take hold. The Bank of Japan should take this into account when it meets. That is why I continue to think that they will not raise rates. At its last meeting, it announced that it would present a plan in July on how it will gradually reduce its gross bond purchases over the coming months. In order to better assess the impact of this move, it makes sense not to raise interest rates at the same time.” (COMMERZBANK)

The Bank of Japan is generally slow and cautious in moving in policy and we think they will disappoint the market which is looking for a rate rise.

US-Japan Rate Interest Differentials

On the other side of the pair, the market is looking for three cuts from the Fed this year with the first in September now fully priced. We have the Fed meeting on Wednesday. We think there is a chance that Fed Chair Jerome Powell errs on the side of caution and delivers a less dovish communication that will underpin the USD.

Keep in mind, Donald Trump looks likely to win the election in November – his policies are inflationary so is it likely the Fed will cut before the election is decided? They might but that's discounted. The good news could be in for the JPY after its recent big rally...

We think the long-term trend is bullish in the JPY but expect it to correct overbought, so we are looking to swing trade long on Bank of Japan holding rates and a less dovish Fed than the market expects.

Sentiment

The COT Net trader's positions show a significant lightening of JPY longs by the commercials and shorts by large speculators we are now techncially overbought and expect a correction in the JPY before higher prices.

Note: On COT Net Traders Data its always foreign currency first so JPY/USD we of course trade USD/JPY and you can see our technical levels on the chart below.

Technical Analysis

We have now closed our short USD/JPY trades and are looking to swing trade long.