Japanese Yen remains heavily offered after BoJ Governor Ueda's remarks, holds above YTD low
|- The Japanese Yen weakens across the board after the BoJ announced its policy decision.
- The BoJ hiked interest rates for the first time since 2007 and also scrapped the YCC policy.
- Hawkish Fed expectations lift the USD to a two-week high and lend support to USD/JPY.
The Japanese Yen (JPY) witnessed a typical sell-the-news kind of trade after the Bank of Japan (BoJ) announced its first rate increase since 2007 and scrapped the Yield Curve Control (YCC) policy this Tuesday. In the accompanying policy statement, the BoJ signalled that monetary policy will remain accommodative for the time being and did not offer any guidance about the future policy steps, or the pace of normalization.
The JPY selling bias remains unabated following BoJ Governor Kazuo Ueda's remarks, which, along with the broad-based US Dollar (USD) strength, lifts the USD/JPY pair to the 150.50 region during the early European session. With the latest leg up, the currency pair has now reversed a major part of the corrective decline registered over the past two weeks and has now moved back closer to the YTD peak touched in February.
Daily Digest Market Movers: Japanese Yen tumbles despite the first BoJ rate hike since 2007
- The Japanese Yen weakens across the board after the Bank of Japan raised short-term interest rates by 10 basis points and indicated that it will gradually reduce purchases of commercial paper and corporate bonds.
- The BoJ also decided to scrap the Yield Curve Control policy, though said that it will continue to purchase Japanese government bonds at a steady pace and will step in when necessary, if yields run too high and too fast.
- The move comes days after Japanese biggest companies agreed to raise wages by the heftiest in 33 years and data showing that inflation remained sticky and that the economy dodged a recession in the fourth quarter.
- Japan's Finance Minister Shunichi Suzuki said that this year's wage negotiations have yielded record-high wage growth so far and that the government will deploy various policies so that positive momentum in wages continues.
- In the post-meeting press conference, BoJ Governor Kazuo Ueda said that the central bank will continue buying 'broadly same amount' of JGB as before and consider options for easing broadly including ones used in past if needed.
- The hotter-than-expected US producer and consumer price data released last week forced investors to trim their bets for a more aggressive policy easing by the Federal Reserve, which continues to lend support to the US Dollar.
- Markets are now pricing in less than three 25 basis points rate cuts in 2024 and about a 51% chance that the Fed will begin the rate-cutting cycle at the June policy meeting, down sharply from expectations at the start of the year.
- Bets that the Fed will keep rates higher for longer lift the yield on benchmark 10-year US government bonds to a three-week high, which adds to the USD strength and supports prospects for further move up for the USD/JPY pair.
- Traders, however, seem reluctant to place aggressive directional bets ahead of the highly-anticipated BoJ policy decision on Tuesday, which will be followed by the outcome of the two-day FOMC meeting on Wednesday.
Technical Analysis: USD/JPY seems poised to challenge YTD top and conquer the 151.00 mark
From a technical perspective, a sustained strength beyond the 61.8% Fibonacci retracement level of the February-March downfall and the 150.00 psychological mark could be seen as a fresh trigger for bullish traders. Moreover, oscillators on the daily chart have just started gaining positive traction, suggesting that the path of least resistance for the USD/JPY pair is to the upside. Hence, some follow-through strength back towards the 151.00 neighbourhood, or the YTD peak touched in February, looks like a distinct possibility. A sustained strength beyond the latter might trigger a fresh bout of a short-covering move and pave the way for an extension of over a one-week-old uptrend.
On the flip side, the 150.00 mark now seems to protect the immediate downside. Any subsequent decline is more likely to attract fresh buyers and remain limited near the 149.20 area. Some follow-through selling, leading to a subsequent break below the 149.00 mark, might shift the bias in favour of bearish traders and drag teh USD/JPY pair further towards 148.30 region en route to the 148.00 mark and the 100-day Simple Moving Average (SMA), currently pegged near the 147.65 region.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.
The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.
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