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Japanese Yen to Consolidate Further Ahead of Next BoJ Meeting

Japanese Yen to Consolidate Further Ahead of Next BoJ Meeting

2013-05-31 22:35:00
David Song, Strategist
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The_Japanese_Yen_body_Picture_1.png, Japanese Yen to Consolidate Further Ahead of Next BoJ Meeting

Japanese Yen to Consolidate Further Ahead of Next BoJ Meeting

Fundamental Forecast for Japanese Yen: Neutral

The Japanese Yen gained ground against its U.S. counterpart even as the Bank of Japan (BoJ) pledged to increase the frequency of its Japanese Government Bond (JGB) purchases, but the pullback in the USDJPY is likely to be short-lived as the central bank carries its easing cycle into the second-half of the year. However, as the central bank moves to the sidelines, the USDJPY may continue to consolidate ahead of the next policy meeting June 11, and the pair may threaten the bullish trend from earlier this year amid the mixed batch of commentary coming out of the world’s third-largest economy.

As the BoJ wants to avoid excess volatility on the bond market, the central bank said it will purchase the region’s public debt 8 to 10 times a month starting June, while International Monetary Fund Deputy Managing Director David Lipton sees a ‘high chance’ for the central bank to achieve the 2% target for inflation as it takes a more aggressive approach in shoring up the ailing economy. Despite growing support for the BoJ, board member Ryuzo Miyao struck a rather neutral tone for monetary policy and said that the central bank has taken all the necessary steps for the time being, while Economy Minister Akira Amari warned about the adverse effects of the easing cycle as Governor Haruhiko Kuroda takes unprecedented steps to address the risks surrounding the region. At the same time, Japanese Finance Minister Taro Aso argued rising JGB yields may negative implication for Japanese lenders while speaking in front of parliament, and we may see the BoJ face increased scrutiny over the near to medium-term as it retains a qualitative/quantitative approach for monetary policy.

Nevertheless, as Japan’s economic docket remains fairly light for the week ahead, we should see the USDJPY continue to consolidate within the upward trending channel from earlier this year, and the dollar-yen may carve out a higher low ahead of the next interest rate decision as Governor Kuroda maintains a highly dovish tone for monetary policy. In turn, we will continue to buy dips in the USDJPY on a longer-term scale, and we may see a move back towards the 50-Day SMA at 98.88 as the pair searches for interim support. - DS

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