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USD/JPY price forecast amid the Bank of Japan’s pivot

Posted: Wednesday, January 4th, 2023

Estimated Reading Time: 3 minutes

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The new trading year started with some big moves in the FX market. For example, the AUD/USD currency pair rose today on the news that China is preparing to lift a ban on Australian coal imports.

Also, financial markets are preparing for the NFP report to be released two days from now in the United States. The report will likely bring outsized moves in the FX market given the lack of liquidity, as most banks are closed due to holidays in Europe.

Therefore, this is a great time to look back at 2022 and make some forecasts for 2023. The Japanese yen (JPY) meltdown was the major theme of last year, and 2023 should be no different.

USD/JPY broke above the 2-4 trendline in 2022

Back in 2021, we were making a case for a bearish USD/JPY movement based on an Elliott Waves analysis. You may check it out here.

The argument was simple: while below the 2-4 trendline, the USD/JPY will find only sellers.

But as time passed, the pair pushed higher and higher. Comes 2022, and it moved above 116 and the 2-4 trendline.

That was a major breakout. In fact, one may argue that it was “the” move of the year in the FX markets. The pair simply blasted out of an ascending triangle and did not look back anymore.

It traveled to above 130 and 140 in such a powerful market move that it forced the Bank of Japan to intervene – not once, but twice.

First, it did so when the exchange rate reached 146. The quick decline of the Japanese yen forced the Bank of Japan to sell US dollars and buy JPY.

Naturally, the market reacted quickly. All the JPY pairs dropped, but they all bounced back as fast as they dropped.

Second, the central bank intervened when the USD/JPY exchange rate traded above 150. It looked like there were no JPY buyers left, as all dips were aggressively bought.

But the Bank of Japan’s signal was strong enough to mark the top of the year. Moreover, the bank prepared a new blowout for USD/JPY bulls.

Bank of Japan’s pivot led to the yen climbing 16% since last October

As it turned out, the Bank of Japan’s intervention was part of a much bigger plan than the market participants thought. At first, investors believed that the intervention was just a regular one and that Japan’s easing policy would not change.

But then, very close to the Christmas holidays, the Bank of Japan signaled that it is letting the yields on the 10-year JGBs rise to 0.5%. Immediately, the JPY exploded higher across the FX dashboard, as the signal was clear – the central bank is finally pivoting from its ultra-loose monetary policy in place for years.

Fast forward to January 2023, the JPY climbed 16 since the October high. The market interpreted the decision to tweak the yield curve control policy as a hawkish move.

However, we should all go back to the 2021 analysis and the 2022 breakout. In light of the bigger picture analysis, the decline in recent months might be just a simple correction.

After all, the exchange rate increased so fast in 2022 that it triggered massive stops to 150 from the 116 breakout point.

130 seems pivotal at this point. Should the USD/JPY hold above, one should not be surprised to see another attempt at 150 in 2023, regardless of the Bank of Japan’s pivot.

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