The FX Trader: The JPY is chopping everyone to bits

The latest

Signals from Japan are confounding the yen narrative. The one-two punch for the JPY bullish view this week have been Japan’s Prime Minister Takaichi coming out and “voicing apprehension” on the prospects of further hikes from the Bank of Japan, and then Wednesday nominating two dovish academic “reflationists” to the Bank of Japan board. The latter move was a real finger in the eye to the notion that the US and Japan were coordinating bilaterally to strengthen yen as it now appears that US Treasury Secretary Bessent may have ordered the “rate check” of USDJPY back on the 23^rd of January unilaterally. Now yen sellers will be thinking that Japan’s political leadership is pursuing an export-driven and nominal GDP growth approach to growing Japan’s nominal economy out of its debt problem with fiscal expansion measures and financial repression (keeping short JGB yields far below inflation and eventually probably capping long rates if they move too much higher or limiting issuance further at the long end and forcing banks and pensions to hold more long JGB’s in their portfolios. Takeaway: this narrows the path of a Japanese yen comeback to the traditional playbook for JPY rally: any outlook for a strong yen from here now more heavily relies on falling yields globally on an economic downturn and a retrenchment in global risk sentiment. Still, it is hard to imagine that even Takaichi wants to pursue an inflationist agenda so aggressively that it weighs on her popularity via even higher inflation on the homefront and geopolitically, USDJPY of 160.00 looks like a line in the sand for relations with the US – and Takaichi is set to travel to meet Trump in Washington on March 19.

USD – waiting for Godot, or at least the Bessent-Warsh playbook. Trump shared nothing that was relevant for financial markets at the longest ever presidential State of the Union address on Tuesday. USDJPY aside, the big dollar is showing no strong signs of life. Its recent rally took out the weakest short USD hands in the likes of EURUSD and GBPUSD, but that move went nowhere and has largely backed out, with no real momentum in the fresh USD selling, either. The US dollar still has a positioning problem as the consensus is for the greenback to continue weakening here. It’s hard to see a bigger catalyst for USD direction unless we get more pointed weakening or strengthening of US economic data and more importantly, a sense of the playbook that will develop as the Treasury-Fed agenda becomes more joined at the hip. That agenda is likely to look something like what Japan is pursuing, let’s realize, which would suggest USDJPY remains in a very “wrong” place. So far, we don’t even have the date for Warsh nomination hearings, which are being held up by the Senate Banking Committee, which refuses to proceed until the Department of Justice drops its investigation of Fed Chair Powell.

Outside of the majors, one currency continuing its recent trend is the Chinese yuan as the USDCNH slide has picked up momentum over the last two sessions to new lows since early 2023 – would think that Chinese officials might soon tap the brakes there as they historically don’t like moves too quickly. Note that CNHJPY is testing all time highs.

Chart focus: USDJPY Ichimoku
The massive break lower triggered by the US “rate checking” USDJPY on January 23^rd was halted just ahead of the 38.2% retracement of the rally off the 139.89 low from last April in the 152.00 area. The initial back-up in early February was uncomfortable enough for sellers looking for a durable new bear trend to develop, but this latest backup suggests we’re stuck in the range until proven otherwise. For Ichimoku technicians, the key local support to maintain the bearish case remains intact as the cloud continues to provide resistance, with Wednesday’s close almost right on the cloud boundary – but it is a very dynamic cloud due to the choppy past price action and the cloud resistance levels will drop next week. Also note that the “lagging span” line (thick green) will have a hard time staying below the past price bars unless we lurch into an immediate and steep decline. In short, short-term (cloud) and long-term resistance (big topping formation – 159.45 high) are in place and the bigger picture still suggest solid credibility that this is a topping formation, but the bears need some encouragement here for fresh involvement. The first step would be a quick erasure of this week’s rally and close well south of 155.00 and even 154.50, though the bigger trigger is that 152.10 range low.