Japanese Yen Gains As Growth Data Put Spotlight On BOJ Policy Shift

Japanese Yen (USD/JPY) Analysis and Chart

• USD/JPY creeps lower again
• Surprise news of recession in Japan has boosted the Yen
• Economic weakness makes the BoJ/s stated aims much harder

The Japanese Yen was stronger against the United States dollar on Thursday despite some dismal economic news out of Japan.

Not only did that country unexpectedly slip into recession according to official data released earlier, it lost its long-held crown as the world’s third-largest national economy in the process. That title now goes to Germany.

Annualized Japanese Gross Domestic Product fell by 0.4% in the old year’s final three months. That was another contraction, joining the 3.3% slide seen in the quarter before. It was also well below the 1.4% increase economists had been looking for.

Action in the currency markets was perhaps a little counterintuitive with the Yen merely adding to gains seen in the previous session. Of course, one never has to look too far for a monetary explanation these days and the Yen’s pep is likely explained by the fact that those horrible numbers will make it more difficult for the Bank of Japan (BoJ) to walk back decades of ultra-loose monetary policy.

The BoJ has been making noises about doing so for some months, but the realistic chances of any such move in a recession must lower, as the market seems to be taking on board.

USD/JPY had been drifting lower in any case from the sharp spike higher which followed stronger-than-expected US inflation figures earlier in the week. The markets still think lower rates are coming from the Federal Reserve, but not before its May meeting at the earliest.

Focus will now be on what either central bank has to say about the most recent developments.

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USD/JPY Technical Analysis

USD/JPY Daily Chart Compiled Using TradingView

USD/JPY has risen far above its old trading range and, although the prevailing uptrend channel looks secure, there must be at least some suspicion that this rally will need some consolidation if it is to challenge the next significant highs. Those come in at 151.924 and were made back in November, the peak, so far of the climb back from the lows of April.

The ability of dollar bulls to hold the line above 150 into this week’s end is likely to be instructive as the pair currently oscillates around that psychologically important point.

USD/JPY is now some way above its 200-day moving average, which comes in well below current levels at 145.178. While there would seem very little chance of a return to those levels anytime soon, a return to the previous range top at 148.749 might be a lot more likely if a consolidation phase sets in. That would not invalidate the current broad uptrend channel which would only be negated by a fall below 148.00.

For now keep an eye on the 150 level.

IG’s sentiment data finds traders skeptical of recent gains and happy to be short at current levels. This likely supports the idea that the current rally will struggle in the near term.

Retail trader data shows 23.10% of traders are net-long with the ratio of traders short to long at 3.33 to 1. The number of traders net-long is 2.29% higher than yesterday and 9.29% lower than last week, while the number of traders net-short is 1.47% lower than yesterday and 17.31% higher than last week.

–By David Cottle for DailyFX