The rumours about BoJ monetary normalization triggered USD/JPY crash

The markets are ruled by rumours. They are especially efficient when investors are bored. For example, in summer, when many of them are on holiday. In 2013, when the former Fed’s chairman Ben Bernanke said about ending QE, the US dollar uptrend started. In 2017, Mario Draghi’s speech in Sintra triggered EUR/USD 14% rally. In 2018, everybody expected the news that BoJ is to correct its monetary policy, as it has been the last giant of quantitative easing program. Alas, but Japanese economy failed in the beginning of the year, the inflation rate in Japan didn’t move to the target, and the rumours faded out. For a while.

Hardly had Reuters, referring to a reliable source in the Governing Council, report that during BoJ meeting on July 30-31 the Japan’s central bank would change it monetary policy, when Japan 10-year bond yield featured the fastest surge over almost two years, and the central bank had to offer to buy an unlimited amount of JGBs at 0.11%. There were no sellers, the market calmed down, but it still believes in possible changes. For example, there may be some flexible mechanism to manage the yield curve. Global bond yields are also sensitive to this situation.

If the Bank of Japan increases its target rate from 0% to 0.1%, investors will see it as the first step towards monetary normalization in Japan. Markets continue losing liquidity, as the Fed goes on its balance sheet normalization; the ECB is going to end QE, now it is the turn of BoJ. As a result, Government Bond yields are rising all over the world, and in the US 10-year bond yield again almost hit the psychologically important level of 3%, supporting the US dollar strengthening.

The markets’ response has once again indicated how careful the Bank of Japan should be. USD/JPY price has been 10% down during the last three years, which, due to the higher import prices and producer prices, sets back the inflation rate. At the same time, the yen safe-heaven status amid the crash of Shanghai Composite and the Chinese yuan only increase the demand for the Japanese yen, adding problems to the Bank of Japan.

Dynamics of Shanghai Composite and Chinese bond yields

Source: Bloomberg

I think, trade wars shouldn’t be ignored as well. The new tariffs have yet a little influence on the global GDP; but if Donald Trump introduces import tariffs on China’s goods worth $500 billion and the EU goods worth $275 billion, the financial markets will be shaken. Especially amid the summer calm, lack of liquidity and increased volatility risks.

I, personally, believe that yen has a substantial growth potential, and only the central banks can discourage USD/JPY bears. Haruhiko Kuroda with the team will have to work hard to dispel the rumours about BoJ monetary normalization; and the Fed will have to prove its independence from Donald Trump’s opinions. Otherwise, the escalation of the US trade war with China, associated with the risks of further decline in China’s economy and global GDP, will support increasing USDJPY short bets, formed due to level 1.22 breakout.

 

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Price chart of USDJPY in real time mode

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