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Awaiting the Bank of Japan’s Next Move

Awaiting the Bank of Japan’s Next Move

James Stanley,

Fundamental Forecast for JPY: Neutral

Matters just haven’t been the same for the Japanese Yen since the BoJ’s surprise move to negative rates at their January meeting. The drives to for the move made sense: After three years of Abe-nomics weakened the Yen and, in-turn, helped Japanese exporters and brought the Nikkei higher, the likely continued slowdown in China threatened to drive a wave of capital out of the Chinese economy seeking safer harbors. Japan would be a likely option for those capital flows as Europe was already deeply into negative-rate territory, and even the Federal Reserve was taking on a more dovish tone (at least Fed member’s commentary was). The very act of this capital flowing into Japan and, in-turn, the Yen, made the likelihood of the last 3 years of Yen weakness coming undone all too real for the Bank of Japan, and this is likely why they made the move when they did.

The unexpected part was how quickly matters would turn against the Bank of Japan. In the day after the announcement on January 29th, the Yen weakened as the BoJ had expected. This set a low, and when markets re-opened after the weekend the Yen began to strengthen massively; powering higher against the US Dollar for eight of the next nine days. At its apex, this was an 8.8% move, in a currency, in less than two weeks. You might be saying ‘oh, 8% isn’t a big deal, stocks move like that all the time.’ But this is a currency with no leverage on it. Meaning 5-1 leverage could’ve amounted to a 44% move.

Further, think about the ramifications of such volatility for exporters. If you’re a Japanese exporter, you were bringing back 8.8% less Yen for every Dollar of sales in the US two weeks after this movement to negative rates. This isn’t the type of thing that instills confidence in an economy and, likely, is creating the exact opposite (not too dissimilar from the opposing impact emanating from the movement to negative rates). But Yen strength didn’t stop there. In the ten weeks since that move to negative rates, the Yen has strengthened by 11.5% against the US Dollar with an additional 2.7% coming in after that initially painful two-week period following the negative rate announcement.

So, it would be great to be able to drive the fundamental forecast for the Yen back to GDP or inflation or other traditional macroeconomic metrics, but that just wouldn’t be accurate at the present. The theme of Yen strength has begun to take on a life of its own, and there is one event that stands head-and-shoulders above the rest as far as risk is concerned, and that’s what the Bank of Japan might do next. The next BoJ meeting on the calendar is set for April 27th and April 28th, and this is likely what traders will be looking at for that next wave of Yen-drivers.

In the meantime, there is a threat to the long side of the Yen, and that’s the prospect of BoJ intervention in the spot market. Earlier this week, the head of the BoJ mentioned that he felt that Yen strength had been ‘excessive,’ which would be the most concerted tone that Mr. Kuroda has offered on such matters publicly. This can also be seen as a threat to traders looking to sit in the long Yen trade. But with a G7 meeting in Tokyo set for May, the timing of intervening in the spot market may be ill-suited to such actions. Previous G7 meetings have seen condemnation around ‘beggar thy neighbor,’ currency-weakness based monetary strategies, and Japan might want to avoid such a scenario on their own home turf.

Because of this murky outlook over the next week and given the fact that we have a full week and a half until the next ‘big’ driver for the Yen, we’re setting the forecast on the Japanese Yen to neutral for the week ahead.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.