USD/JPY Forecast – Will BOJ trigger an inverse head and shoulder breakout?

USD/JPY Forecast – Will BOJ trigger an inverse head and shoulder breakout?

USD/JPY is trading volatile in Asia as markets brace up for an extreme Bank of Japan (BOJ) stimulus. Kuroda denied helicopter money about 8 days ago, but official denial is almost always a confirmation as discussed in the morning report titled “USD/JPY – Falling channel intact, Can we trust Kuroda on helicopter money?"

The pair has clocked a low of 103.35 earlier today and now trades around 104.75 levels. An extreme action could send Yen sharply lower across the board. Commodity dollars/JPY pairs may underperform as NZD, AUD are both under pressure due to heightened expectations of RBNZ and RBA rate cut in August. However, these crossed would do well if BOJ falls short of expectations. A major beneficiary of an extreme stimulus could be Gold in JPY terms (XAU/JPY). Silver has had a stellar run and could continue to gain grounds as well. 

If BOJ does fails to meet expectations, Yen could stage a rebound. Negative rate move on Jan 29 wasn’t well received; hence it is necessary that the BOJ comes out with something extreme if it wants a weaker Yen. There are also concerns of bond market liquidity, so it will be interesting to see how BOJ can boost debt purchases without destabilizing the bond markets.

Technicals – Inverse head and shoulder on daily chart

Daily Chart

• We have an inverse head and shoulder formation with neckline resistance at 107.81 (also 100-DMA level). Inverse head and shoulder is a reversal pattern and needs to occur at the bottom of the trend, which is the case on USD/JPY daily chart.
• We also have a larger falling trend line resistance at 106.17 and a key Fibo level at 106.64 (38.2% of 2011 low – 2015 high)
• An inverse head and shoulder breakout on daily closing basis would open doors for 114.00 levels (breakout target).
• Key resistance on the way higher - 109.13 (38.2% of 125.856-98.787), 110.00 (zero figure), 112.32 (50% of 125856-98.787), 113.98 (23.6% of 2011 low-2015 high)
• On the other hand, if the BOJ falls short of expectations, the pair could head lower to 100 levels. A violation there could expose Brexit day low of 98.787. Larger falling channel support is seen around 97.90 levels.

EUR/JPY – Extreme BOJ action could trigger bullish break from symmetrical triangle

Daily chart

Chart shows a symmetrical triangle formation with resistance at 120.40 and support at 113.67 levels.

The cross currently trades around 115.75 levels. On the way higher, it faces strong hurdle at 116.72 (23.6% of 141.055-119.205). Offers have repeatedly hit the pairs above the same for last two weeks. Hence, a break higher could yield a jump to 118.78 (23.6% of 149.787-109.205).

On the lower side, a bearish break below 113.67 would open doors for a re-test of 109.20 (Brexit day low).

Note – The rally in the US stocks from post Brexit day low appears to have been fueled by rise in USD/JPY (fiscal + monetary) stimulus expectations. The fiscal stimulus package to be announced next week includes only JPY5 trillion or so of fresh spending. Hence, Yen weakness needs an extreme monetary stimulus.

If BOJ fails to deliver, it could drag US stocks lower, which will further add to the bid tone around the Japanese Yen.