USDJPY analysis. USDJPY speculative positions depend on the outcomes of the BoJ meeting
The Japanese yen, having been focused on the interests of others for a long time, has at last remembered of its own. Global risk appetite, foreign background and the Fed monetary policy were replaced by the rumours about changing the BoJ monetary policy, making the financial markets rather worried. The Japan’s QE is an important source of liquidity, Japanese investors are active on global bond market, and their willingness to repatriate the capital can shake the markets quite a lot.
The talks about possible correction of the yield curve control policy pushed the Japan 10-year yield above the important level of 0.1%. The BoJ had to make interventions twice during one week, offering to buy unlimited amounts of the 10-year notes at a yield of 0.11% and 0.1%. If the first offer wasn’t demanded, the second one resulted in purchasing bonds worth ¥94 billion ($847 million). It is far less than in February 2017 (¥723.9 billion); but at that time, it was about panic, now, it is just about rumours.
BoJ interventions in the bond market
Investors worry because of the talks about changes in the strategy of targeting the yield curve. The Bank of Japan faces a pressure to normalize its monetary policy, and its activities directly influence bank profits. However, its inability to boost inflation to its target and the risks of excessive financial markets turbulence make the financial regulator put off any corrections.
If the cheap money policy doesn’t produce the needed effect, it must be corrected. Especially since the risks of global recession are growing over the time. If the Fed will provide itself with a substantial margin of safety by 2020 -2021in the form of high federal funds rate, the BoJ may face the rough times without any weapons. On the other hand, Haruhiko Kuroda at the G20 summit said that he knew nothing about any changes in the BoJ monetary policy, and in case there were any, that would deliver a serious blow to the credibility of the Governor of Bank of Japan.
So, there are three possible scenarios. The first one suggests that the meeting of BoJ board members on July 30 -31 won’t feature any surprises. The BoJ overnight call rate will remain negative, monetary base will continue nominally expand by ¥80 trillion per year, and it will be still unknown when inflation will reach its 2% target. In this case, USDJPY price is likely to rise towards 112.5-113, due to the principle “sell on rumours, buy on facts”.
Any hints at the corrections in the yield curve control policy will shake global bond market. The capital repatriation to Japan by Japanese investors will increase the demand for yen and push USDJPY quotes down towards 108.7-109.2. Next, I expect consolidation, followed by the middle-term trading range of 108-112. Only the official announcement of soon monetary normalization may send the USDJPY rate significantly down.
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Real-time price chart of USDJPY
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