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USD/JPY Rate Outlook Hinges on BoJ Forward Guidance

USD/JPY Rate Outlook Hinges on BoJ Forward Guidance

Daniel Moss, Analyst

Bank of Japan, BoJ, USD/JPY, FOMC, Monetary Policy Talking Points:

  • The Bank of Japan is expected to maintain current monetary policy settings, after keeping rates on hold at emergency meeting in May
  • Governor Kuroda may echo statements from Federal Reserve Chair Jerome Powell
  • USD/JPY has rallied since snapping 12-week uptrend. Will the recovery continue?

No major changes to the Bank of Japan’s monetary settings are expected Tuesday, as the central bank assesses the effectiveness of the ¥‎75 trillion in stimulus unleashed since March.

In response to the COVID-19 pandemic, Governor Haruhiko Kuroda and the BoJ introduced the ‘Special Program to Support Financing in Response to the Novel Coronavirus’ to “support financing of firms and maintain stability in financial markets”.

The limitless purchase of Japanese government bonds (JGB), an increase in the upper limit of exchange-traded fund holdings to ¥‎12 trillion, and the active buying of corporate bonds and commercial paper, has seen the “tension in financial markets abate somewhat”.

The BoJ’s forward guidance will be heavily scrutinized in the absence of any major shifts in policy, with the possibility that Governor Kuroda could hint at a sustained period of negative interest rates, echoing the comments from Federal Reserve Chairman Jerome Powell at last week’s FOMC meeting.

Bank of Japan vs Federal Reserve Balance Sheet

Image of Bank of Japan Balance Sheet

Source – Federal Reserve Economic Data (FRED)

With Japan “on course to experience its deepest recession of the post-war era”, according to the Organization for Economic Co-operation and Development (OECD), GDP is expected to fall by at least 6% in 2020 should the reopening of the economy continue unabated by further coronavirus outbreaks.

A secondary outbreak resulting in the reimposition of lockdown measures, described as the ‘double-hit’ scenario by the OECD, could see the local economy shrink by 7.25% with headline inflation “projected to turn negative in 2020”.

As cases in Tokyo surge after the reopening of nightclubs and entertainment establishments, a second wave of the novel coronavirus could yet call for more action from the BoJ as “the Bank will closely monitor the impact of COVID-19” and “will not hesitate to take additional easing measures if necessary”.

Source - OECD

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USD/JPY Daily Chart

Image of USD/JPY Rate Daily Chart

Source – Trading View

The recent risk aversion, due to growing fears of secondary COVID-19 outbreaks, has seen the Japanese Yen strengthen against its US Dollar counterpart as USD/JPY dropped 3% in four days after setting the monthly high on June 5 (109.85)

A surge in bearish price action, just shy of the 2015 downtrend, catapulted USD/JPY through the uptrend from the March low (101.18) and 200-day moving average (107.76).

Prices have since rallied from the 38.2% Fibonacci (106.65) although with both the Relative Strength Index (RSI) and momentum indicators snapping their respective uptrends, there is a suggestion the recovery may be only temporary in nature.

A failure to close above resistance at the 38.2% Fibonacci (107.69) and 200-MA (107.76) may lead to price falling to re-test the May low (105.99), with the RSI strengthening below 40 possibly signalling an extended decline towards the key 61.8% Fibonacci retracement (105.20) of the March range.

However, should price remain constructive above the May 29 low (107.07) a push back to the 50-MA (108.31) may eventuate if the psychologically imposing 108-handle can be successfully overcome by buyers.

-- Written by Daniel Moss

Follow me on Twitter @DanielGMoss

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