Buying USDJPY on expectation of correction

The Bank of Japan is setting the stage to raise interest rates by claiming victory in its long battle with deflation.

After decades of mostly zero or negative growth, core inflation has remained above the Bank of Japan's 2% target for more than two years. In June, it reached 2.6%.

The survey among 2,509 companies released in May found that many of them consider an economy where both prices and wages are rising to be more favorable than one where both are stagnant.

The assumption of the possible further policy tightening has already been taken into great consideration by the market and caused USDJPY to drop sharply last week.

Investors cut 56,639 net short positions on the Japanese currency over two weeks to July 23, the largest cut since early 2011, according to the Commodity Futures Trading Commission.

It marks a reversal of expectations that interest rates in Japan will finally move into the positive zone.

Options traders' positions on a rate hike by the Bank of Japan rose from less than 40% to nearly 90% last week.

At the same time, there are growing expectations in the market that the Fed will ease its monetary policy, which may give additional downward momentum to USDJPY.

As already mentioned, the market has probably already taken into account the forthcoming changes to a large extent and acted ahead of these events. In this situation, a series of corrective moves of USDJPY from the support formed at 152.0 up to 154.5 is seen as a reasonable scenario.

The final recommendation is to buy short-term USDJPY when the price hits 152.0.

Profits should be taken at the level of 154.5. The Stop-loss could be set at the level of 149.7.

The possible loss should not exceed 2% of your deposit funds.