Chinese rate cut triggers USD/JPY sell opportunity for three reasons, levels to watch

Chinese rate cut triggers USD/JPY sell opportunity for three reasons, levels to watch
  • USD/JPY has bounced after China announced a rate cut and boosted the market mood.
  • Japan's high inflation, comments from Japan's PM and a return to a sour mood point lower.
  • The double-bottom of 127 is the big prize for bears.

USD/JPY bearish – China cut its LPR interest rate, which improved the market mood and especially hit the safe-haven Japanese yen, which benefits from demand when things go wrong in Asia. China's shot in the arm for its economy is a bullet in the arm for the yen.

However, there are three other factors to consider. First, the weakness of the Japanese yen has gone too far – and that is seen in inflation figures. The National Core Consumer Price Index jumped from 0.8% YoY in March to 2.1% in April. While that seems low in comparison to American or British inflation, that may push the Bank of Japan to moderate its ultra-loose monetary policy.

The second factor is a verbal intervention – but from the Japanese Prime Minister Fumio Kishida. The leader of the world's third-largest economy said that rising raw material prices alongside a weaker yen is affecting households and businesses. He also called on keeping close ties with currency authorities overseas. Does he want a coordinated effort to strengthen the yen? Is he conveying a message to the BOJ regarding its policies? A rare comment from Kishida may give a boost to the yen.

The third factor is the day of the week – investors tend to take risks off the table on Friday. While China has improved the mood, it could sour once again, sending money to bonds and lowering their yields. USD/JPY is highly correlated with US 10-year Treasury yields.

USD/JPY Technical Analysis

Chinese rate cut triggers USD/JPY sell opportunity for three reasons, levels to watch - 1

Technicals also support a resumption of the fall. USD/JPY is trending within a broad downtrend and has failed to break above the 4h-200 SMA. Momentum remains to the downside and the RSI is between 30 to 50, pointing to further falls.

Some support is at 127.60, the previous monthly low, and it is followed by 127, which has witnessed two lows. Even lower at 126.20 provided a cushion in April. Looking up, resistance is at 128.20, the daily high.

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