The stalemate in the negotiations between Tokyo and Washington and the dividend payout season increase the risks of a short-term decline in the USD/JPY
While the market cannot figure out whether the decision of the Bank of Japan to expand the boundaries of the trading range rates for 10-year bonds from +/- 0.1% to +/- 0.2% can be referred to as monetary stimulus or the first step to normalize monetary policy, the USD/JPY finds a haven in consolidation. On the one hand, investors have a desire to test the upper limit, which resulted in profitability reaching 18-year highs and the BoJ's bid to buy securities for ¥ 400 billion ($ 3.6 billion). We are talking about expanding the monetary base. On the other hand, the market was waiting for adjustments in the strategy of targeting the yield curve. And they came.
If you own 65% of the entire debt market with a maturity of 5-10 years, you can afford to play cat and mouse. The Bank of Japan is in a much better position than its counterparts in Beijing. PBOC is struggling over a puzzle of how to keep the cost of borrowing at a low level and prevent the devaluation of the yuan. BoJ has already come up with the answers to similar questions. It keeps the yield in the range of +/- 0.2%, pours liquidity into the system and therefore throws sand in the wheels of the USD/JPY bears.
Share of the Bank of Japan in the structure of the debt market
In my opinion, only the dollar's migraines do not allow the USD/JPY to go above current levels. Will the US GDP keep the speed it demonstrated in the second quarter? Against the background of positive data on the labor market and inflation, why cannot the chances of four acts of monetary restriction by the Fed in 2018 hold above 70%? What prevents the profitability of 10-year US bonds to gain a foothold above the 3% mark? The answer to the last question must be sought ... in Japan. Investors from the Land of the Rising Sun have accumulated $ 2.4 trillion in portfolios of foreign bonds, 45% of which are issued in the States. Not surprisingly, the rumors about adjusting the yield curve management strategy led to an increase in Treasury rates above 3%, and once they were disproven, yields returned below the psychologically important mark.
Structure of investments of Japanese investors in foreign bonds
Trade wars are also essential for clarifying the medium-term prospects of the USD/JPY. The five-week winning series of the S&P500, the longest since December, amid a loss of capitalization of $ 2.3 trillion by the Chinese stock market shows that for now, the advantage is on the side of the United States. This circumstance provides support to the US dollar not only against the yuan, but also against the main competitors from the G10, including the yen. How long will such a balance of forces continue? It may last until the autumn parliamentary elections in the States. Donald Trump is true to his promise to punish China and is unlikely to stop.
The factor of the season of dividend payments that strengthens demand for yen in the short term and Tokyo and Washington trade talks on August 9 may lead to lower quotations of the USD/JPY. Personally, in the light of the foregoing, I see a limited potential for such a move and predict medium-term consolidation of the pair in the range of 109-113.5.
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Price chart of USDJPY in real time mode
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