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Dovish Bank of Japan (BoJ) Forward-Guidance to Keep USD/JPY Bid

Dovish Bank of Japan (BoJ) Forward-Guidance to Keep USD/JPY Bid

David Song, Strategist

Japanese Yen Talking Points

USD/JPY pares the decline from the previous week, with global equity prices reflecting a similar dynamic, and the exchange rate may stage a larger rebound going into the Bank of Japan (BoJ) interest rate decision on October 31 as it snaps the recent series of lower highs.

Image of daily change for major currencies

Dovish Bank of Japan (BoJ) Forward-Guidance to Keep USD/JPY Bid

Image of daily change for usdjpy rate

It looks as though swings in risk appetite will continue to sway USD/JPY ahead of the BoJ meeting in light of the mixed reaction to the U.S. Gross Domestic Product (GDP) report, and the exchange rate may exhibit a more bullish behavior over the remainder of the month as Governor Haruhiko Kuroda & Co. stick to the Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control.

Image of boj inflation forecast

The BoJ appears to be in no rush to abandon its easing-cycle as the board struggles to achieve the 2% target for inflation, and the central bank may continue to fine-tune its asset-purchase program in 2019 as a growing number of officials endorse a dovish forward-guidance for monetary policy. Keep in mind, BoJ board member Goushi Kataokadissented at the last meeting as ‘the year-on-year rate of change in the CPI increasing toward 2 percent going forward was low at this point,’ and pushed the ‘Bank to make a commitment to taking additional easing measures if it revised downward its assessment of medium- to long-term inflation expectations.’

In turn, the diverging paths may keep USD/JPY afloat as the Federal Reserve appears to be on track to implement another rate-hike in December, but the dollar-yen exchange rate stands at risk of facing range-bound conditions going into the end of the month as retail interest abates.

Image of IG client sentiment for usdjpy

The IG Client Sentiment Report shows 52.1% of traders are net-long USD/JPY, with the ratio of traders long to short at 1.09 to 1. Nevertheless, the number of traders net-long is 14.8% lower than yesterday and 18.3% lower from last week, while the number of traders net-short is 16.1% lower than yesterday and 10.9% lower from last week.

The drop in market participation leaves USD/JPY vulnerable to whipsaw-like price action, with the recent shift in client sentiment clouding the near-term outlook. In turn, dollar-yen may stage a larger advance if the change in retail interest persists, but the exchange rate may continue to threaten the upward trend from earlier this year as the dual threats of rising tariffs, rates add to the global wall of worry. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

USD/JPY Daily Chart

Image of usdjpy daily chart
  • USD/JPY appears to be on track to test the 112.40 (61.8% retracement) to 113.00 (38.2% expansion) hurdle as the 111.10 (61.8% expansion) to 111.80 (23.6% expansion) region continues to offer support.
  • Break/close above the stated region raising the risk for a move towards 113.80 (23.6% expansion) to 114.30 (23.6% retracement), with the November 2017-high (114.74) coming up next.
  • Keeping a close eye on the Relative Strength Index (RSI) as it reverse course ahead of oversold territory, with the oscillator fostering a constructive outlook for USD/JPY as the momentum indicator continues to respond to the bullish formation from earlier this year.

For more in-depth analysis, check out the Q4 Forecast for the Japanese Yen

Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

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

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