USD/JPY Bulls On High Alert For Breakout As Japanese Yen Slumps

USD/JPY extended its rally on Monday as the Japanese yen sold off sharply amid political shifts in Tokyo. Traders reacted to reports that Sanae Takaichi — a pro-stimulus candidate and vocal critic of Bank of Japan (BOJ) rate hikes — is poised to become Japan’s first female prime minister, triggering a broad yen decline and renewed interest in carry trades.

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Japanese Yen Slumps As Takaichi’s Stimulus Agenda Takes Centre Stage

The Japanese yen was sharply lower against its FX peers on Monday, as a dovish, pro-stimulus candidate took the lead to become Japan’s next prime minister. Sanae Takaichi looks set to become Japan’s first female PM and has been a vocal critic of Bank of Japan (BOJ) rate hikes. Odds of a near-term 25bp hike have fallen from around 68% to 41%, triggering a surge in Japan’s bond market, weighing on yields and sending the yen lower across the board.

However, an advisor close to Takaichi suggested she may still tolerate one more 25bp hike. An ex-BOJ official also noted recently that she might have limited influence over the central bank even if she does take office. While it remains up in the air whether her victory would spell the end of BOJ tightening or simply slow its pace, the news was enough to prompt many yen bulls to reassess their exposure.

Commodity currencies took the lead as the carry trade sprang back into action, with AUD/JPY, CAD/JPY, and NZD/JPY all rising around 2% by Monday’s close. USD/JPY climbed 1.9% to finish above 150, while GBP/JPY accelerated beyond 200 to a 15-month high. EUR/JPY now trades at its highest level since 1991, and both CHF/JPY and the Nikkei surged to record highs, marking their best day since April.

Chart prepared by Matt Simpson - Source: LSEG

Japanese Yen Futures Positioning (JPY/USD) – Weekly COT Report Analysis

Last week’s commitment of traders (COT) report shows that pre-emptive bulls were caught off guard. Net-long exposure for large speculators and asset managers rose by a combined 25.6k contracts on the week by Tuesday’s close. The proportion of which came from the initiation of fresh bullish bets, with large specs increasing their gross-long exposure to the yen by 9% and asset managers by 8%, or a combined 22.5k contracts. Large specs also reduced gross-short exposure by -3.5% (-3.6k contracts).

Many of these pre-emptive bulls may have covered their longs, and that see the yen face further selling pressure over the near term until we get greater clarity over Takaichi’s sway over the BOJ and their ability to hike interest rates.

Chart prepared by Matt Simpson - Source: CME, IMM, LSEG

USD/JPY Technical Analysis: US Dollar vs Japanese Yen

The 192-pip gap from Friday’s close to Monday’s open was the largest on the USD/JPY daily chart since May 1990, which incidentally was also a gap lower from similar levels around 150. Monday’s 1.9% daily gain marked its strongest single-day performance in nine weeks and lifted USD/JPY to within 23 pips of the August high.

The surge has invalidated last week’s bearish bias and has bullish breakout traders on high alert, though a sustained rally will likely depend on confirmation that Japan’s incoming prime minister can influence the BOJ’s hiking path.

Traders will also eye Friday’s Nonfarm Payrolls for clues on the Fed outlook — a weak print could reinforce expectations for back-to-back rate cuts in October and December. For now, however, dips appear likely to attract buyers, with focus on a retest of the 151.28 double-top high.

A decisive break above that level would expose the weekly R3 pivot and the 152 handle over the near term.

Chart analysis by Matt Simpson - data source: TradingView USD/JPY

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-- Written by Matt Simpson

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