Japanese Yen bulls seem reluctant amid positive risk tone; focus remains on BoJ
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Haresh Menghani
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23 Jan @ 02:38 (GMT+0)

Japanese Yen bulls seem reluctant amid positive risk tone; focus remains on BoJ

  • The Japanese Yen drifts lower for the second successive day against its American counterpart. 
  • A further recovery in the US bond yields underpins the USD and supports the USD/JPY pair. 
  • Traders now look to Trump’s speech for a fresh impetus ahead of the BoJ decision on Friday. 

The Japanese Yen (JPY) recovers a few pips after hitting over a one-week low against its American counterpart and trades in neutral territory heading into the European session on Thursday. The growing acceptance that the Bank of Japan (BoJ) will hike interest rates at the end of a two-day policy meeting on Friday continues to underpin the JPY. Apart from this, the better-than-expected release of Trade Balance data from Japan turns out to be another factor that offers some support to the JPY.

The JPY bulls, however, seem reluctant amid US President Donald Trump's trade policies and ahead of the highly-anticipated BoJ policy decision. Furthermore, a modest uptick in the US Treasury bond yields acts as a tailwind for the US Dollar (USD) and the USD/JPY pair. That said, the divergent BoJ-Federal Reserve (Fed) policy expectations warrant some caution before positioning for any further appreciating move for the currency pair as traders look to Trump's speech for a fresh impetus. 

Japanese Yen traders seem non-committed ahead of the crucial BoJ policy decision on Friday

  • The Japanese Yen ticked higher after government data released this Thursday showed that Japan recorded a trade surplus of ¥130.9 billion in December, compared to expectations for a deficit of ¥55 billion. 
  • The turnaround was driven chiefly by resilient exports, which grew more than expected, by the 2.8% YoY rate in December. This, however, marked a notable slowdown from the 3.8% rise seen in the prior month. 
  • Meanwhile, imports picked up after contracting by the 3.8% YoY rate in November and grew 1.8% last month, missing consensus estimates for a 2.6% rise and indicating that local demand remains subdued.
  • Annual spring wage negotiations kicked off in Japan on Wednesday, with the leaders of the top business lobby and the biggest labor unions agreeing on the need for pay hikes for more workers amid soaring prices. 
  • The Bank of Japan, which is scheduled to announce its monetary policy decision on Friday, has repeatedly said that sustained and broad-based wage hikes are a prerequisite to raising short-term interest rates.
  • The markets are pricing in over a 90% chance that the BoJ will raise interest rates at the end of the January 23-24 meeting, from 0.25% to 0.50%, which would be the highest since the 2008 global financial crisis.
  • This marks a big divergence in comparison to market expectations that the Federal Reserve will lower borrowing costs at least two times by the end of this year amid signs of abating inflationary pressures in the US. 
  • Some follow-through uptick in the US Treasury bond yields assists the US Dollar in holding steady above the monthly low touched on Wednesday and acts as a tailwind for the USD/JPY pair amid the risk-on mood. 
  • Investors now look forward to the release of the US Weekly Initial Jobless Claims for some impetus ahead of US President Donald Trump's speech later today and the outcome of a two-day BoJ policy meeting on Friday. 

USD/JPY technical setup supports prospects for a move beyond the 157.00 round-figure mark

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From a technical perspective, spot prices earlier this week found decent support and bounced off the lower end of a multi-month-old ascending channel. The subsequent strength beyond the 156.00 mark and the 156.30-156.35 area favors bullish traders. Moreover, oscillators on the daily chart have again started gaining positive traction and support prospects for further gains. Hence, some follow-through move towards the 156.75-156.80 region, en route to the 157.00 round figure, looks like a distinct possibility. The latter should act as a key pivotal point, which if cleared decisively should pave the way for a further move up towards the 157.55 area, the 158.00 mark, the 158.35-158.40 region and the 159.00 neighborhood, or a multi-month top touched on January 10. 

On the flip side, the 156.30-156.25 area now seems to protect the immediate downside ahead of the 156.00 mark. The next relevant support is pegged near the 155.55-155.50 area, below which the USD/JPY pair could accelerate the fall towards the 155.00 psychological mark, which now coincides with the lower boundary of the ascending channel. Some follow-through selling below the 154.80-154.75 region, or over a one-month low touched on Tuesday, will be seen as a fresh trigger for bearish traders and drag spot prices to the 154.00 round figure en route to mid-153.00s and the 153.00 mark.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.