Market update: historic rate rise on track despite recession, USD/JPY contained

Markets anticipate April for potential rate hike

Markets have remained unfazed by Japan's recent entry into a recession, continuing to signal a high likelihood that the Bank of Japan will opt to increase interest rates by 0.1% in an effort to exit its prolonged negative interest rate policy.

The Bank's conditions for this significant hike include establishing a "virtuous relationship" between wages and prices. Inflation has stayed above the 2% target for more than a year, although it has decreased in the latest two reports, raising questions about the sustainability of price pressures above the 2% target.

Wage negotiations are in progress, expected to conclude by mid-March. This is the foundation for market speculation that the April meeting will bring the crucial rate hike.

CoT report indicates significant increase in yen shorts despite FX intervention warnings

Recent CoT data shows a surge in yen short positions, contradicting last week's warnings from Japan's principal currency official, Kanda, and the Bank of Japan's Deputy Governor, Shun’ichi Suzuki. Both officials have voiced their concerns over sharp and volatile FX movements (yen depreciation), with Kanda even suggesting FX intervention as a potential measure.

Positioning via Commitment of Traders Report (includes data up to 13 Feb)

USD/JPY cautiously maintains the 150 level

Despite warnings of FX intervention, USD/JPY continues to hold the 150 level. Indeed, current price action is creating a pennant-like formation, indicating a possible bullish continuation under normal market conditions. However, the potential for intervention poses a significant risk, making upward movements a gamble with a low risk-to-reward ratio, as historical FX interventions have typically caused the yen to shift by approximately 500 pips, mostly downward.

Should bulls manage to push prices towards 146.50, it may prompt scrutiny from the finance ministry, potentially leading to requests for FX quotes from banks. This approach has historically preceded large-scale yen purchases. Support is currently at 146.50, with resistance noted at the recent peak of 150.88, followed again by 146.50.

USD/JPY daily chart

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