USDJPY – Monthly Analysis for January 2015

USDJPY might have enjoyed a bull run last year in lieu of its major trend but the longer term monthly charts shows possible headwinds that could potentially cap further rallies near 123.1 – 123.3 levels.

Regardless of which way one views the USDJPY charts, one clear pattern that is emerging is the fact that USDJPY could possibly take a breather this year while heading towards making a fairly decent correction back down to 102 – 103 levels. The monthly candlestick pattern for December does not indicate any reversals as of yet, but the fact that price testing both the highs and lows and being rejected at either ends gives clues that the month of January could be critical for this pair, depending on how price action will evolve.

 

For the moment, the monthly highs near 121 were rejected as price hit a major long term trend line that was well respected in the past. Although the bull flag on the monthly charts continues to be the major chart pattern in focus, price has currently traversed close to 161.8% of the flag, with little to no retracement, indicating that a proper correction could ensue down to 102 – 105 levels in the coming months.

The December’s price action however does tell us that any long term positions on the long side could possibly be a bit risky at this point in time, with the exception of short term trades.

Fundamentally, the USDJPY has been driving ahead primarily due to the vastly divergent monetary policies between the US Federal Reserve and the Bank of Japan.

In a recently released report by the BoJ, Governor Kuroda said that the BoJ had many other tools to ease monetary policy while staying determined that the BoJ would hit its inflation target in the current fiscal year. Last year, the BoJ expanded its QQE program twice, in February and later in October and followed up by a fiscal stimulus package later in December after Abe’s election victory, besides postponing the sale tax hike until 2016.

The BoJ has been rife with speculation that some of the monetary policy members wanted the BoJ to abandon its inflation target as they found it to be too ambitious. These rumors were however put to rest in the report where Governor Kuroda commented that giving up on the Central bank’s commitment to the inflation target was out of question. However some of the economists are not quite convinced with the verbal rhetoric especially in current circumstances where Crude Oil has played a major role in putting downward pressure on inflation across the globe.

The US Federal Reserve on the other hand is expected to raise interest rates as early as June this year, according to the market estimates and provided economic data continues to support the interest rate hike.

Considering the above factors and combining it with the technical levels mentioned earlier, USDJPY could possibly look towards correcting itself ahead of achieving a larger price objective, upwards of 130 in the very long term view.