Trade Of The Week: USDJPY Primed For Heavy Event Week

Watch this space as the USDJPY could end April with a bang!

Later this week, investors will be served a super combo of top-tier economic data combined with the Bank of Japan (BoJ) rate decision. With so much going on over the next few days, it may be wise to fasten your seatbelts as volatility could be on the horizon.

It has been a rough month for the Japanese Yen. The currency was an easy target for other G10 counterparts as the BoJ continued its ultra-low interest rates as expectations grew over the Fed raising rates in May. Easing fears over a global banking crisis has also contributed to the Yen’s woes with the improving sentiment directing investors toward riskier assets.

Looking at the technicals, the USDJPY was trapped within a range last week with support at 133.70 and resistance at 135.00. Prices are trading above the 50 and 100-day SMA while the MACD trades to the upside. However, the currency pair seems to be slowly approaching overbought conditions.

The USDJPY could be gearing up for a major move and here are 3 reasons why…

1. Bank of Japan rate decision

The Bank of Japan’s first policy meeting under Governor Zauo Ueda will be the main risk event for the Yen on Friday.

Despite Japan’s consumer inflation holding above the central’s target, the BoJ is widely expected to maintain rates at -0.1% and keep its yield-curve control settings unchanged. Policymakers may be reluctant to act too soon given Japan’s fragile recovery and lingering uncertainty over the banking crisis overseas. However, any signal from Ueda that the central bank could turn neutral on the forward guidance could sow the seeds for tighter policy – ultimately boosting the Yen.

It will be wise to also keep a close eye on Japan’s latest CPI, Industrial production, retail sales, and unemployment figures which could provide fresh insight into the health of the economy. A hot inflation print coupled with strong data may fuel speculation around the BoJ pivoting down the line. Alternatively, a soft inflation report and disappointing data could strengthen the argument around extended periods of ultra-loose monetary policy.

2. Earnings + key US economic reports

Some of the largest companies in the world will be reporting their earnings this week which could trigger significant volatility across financial markets. If the earnings paint an overall positive picture, this could boost risk appetite at the expense of safe havens like the Yen. However, a set of disappointing earnings could rekindle risk aversion, boosting attraction for the Yen and other safe-haven destinations.

There are some major releases from the US economy ranging from the April consumer confidence data, Q1 GDP figures, and the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditure. First quarter US GDP is expected to moderate from the 2.6% in the previous quarter while persistent price pressures may be evident in Friday’s core PCE data which should highlight why policymakers remain concerned. Ultimately, if the data supports bets around the Fed keeping interest rates higher for longer, this may propel the USDJPY higher.

3. Bulls and bears engaged in tug of war

Taking a look at the technical picture, there seems to be a tussle between bulls and bears on the daily timeframe with a potent fundamental spark needed to shift the balance of power in one direction. A solid breakout and daily close above 135.00 could encourage a move towards levels not seen since early March at 137.00 – a level where the 200-day Simple Moving Average (SMA) resides. Should prices slip below 133.70, the USDJPY could decline towards 132.90 and 131.20, respectively.