The Japanese currency may take advantage of the weakness of its main competitor
The market is full of surprises. Investors doubt that the USD/JPY that has been hanging out in the range of 111.5-113 for two decades will be able to leave it thanks to the meeting of the Bank of Japan scheduled for October 30-31. None of the 46 Bloomberg experts expects the regulator to make any adjustments to monetary policy, 63% of respondents believe that adjustments to inflation forecasts are out of the question, 33% believe that estimates will be slightly reduced. Boring, really. However, quite different rumors are spreading on the market.
Competent sources of Reuters reported that the BoJ is considering measures that can revive the debt market of Japan. Currently, the central bank, in the implementation of the QE, buys bonds the day after the auction, which reduces market activity. Players buy bonds at initial placement and sell them to the regulator, practically without trading among themselves. A sluggish market forces residents to seek fortune abroad, and liquidity going outside the country reduces the effectiveness of the monetary stimulus. It is the inability of inflation to grow under the influence of a large-scale quantitative easing program that forces the Bank of Japan to be creative. It can shift the time of its entry into the secondary market, which will add uncertainty and volatility.
In my opinion, changes in the mechanism of the QE implementation can be perceived by investors as a signal of the normalization of monetary policy by the BoJ, which will strengthen the yen. Moreover, the exit of the market from hibernation can reduce interest with it as a funding currency on the part of carry traders. Despite the lack of faith in the Bank of Japan quickly departing from negative rates, the October survey of experts from Bloomberg showed that an increasing number of respondents believe that this will happen no later than the end of 2020 (49% vs. 35% in September).
Forecasts for the BoJ rate hikes
According to CIBC, rumors about the normalization of BoJ’s monetary policy, Japan’s impressive current account surplus, its net creditor status, as well as the increasing risks of collapsing short speculative yen positions that reached 8-month highs on the yen, allow us to count on the USD/JPY making a journey to 110 and below.
In my opinion, the catalyst of the peak of the pair can be a confident test of support at 111.5. If the US economy has really peaked, then the process of closing longs in the US dollar will gain momentum. At the same time, the correction of the S&P500 and the tightening of financial conditions increase the likelihood of a slowdown in the process of raising the federal funds rate. At the same time, there is a growing demand for safe-haven assets, which helped the yen during the US Forex sessions in October. At the Asian auction, the USD/JPY, as a rule, was bought out, which made it possible to form a consolidation range of 111.5-113.
Thus, the favorable background for the yen, changes in the monetary policy of the Fed and the Bank of Japan, the adjustment of speculative positions in both currencies of the pair make it possible to count on the USD/JPY going south in case of a confident attack on 111.5.
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