Japanese Yen Slides as Speculation Mounts Ahead of BoJ Meeting. Where to for USD/JPY?
Japanese Yen, USD/JPY, US Dollar, BoJ, YCC, Ueda, Fed, Yield Spreads - Talking Points
- USD/JPY has steadied so far today after stretching higher
- The BoJ is in focus for Friday, but are not expected to move on policy
- The Fed is forecast to hike. If they do, will it send USD/JPY to a new peak?
The Japanese Yen slumped last week with USD/JPY rallying to make a peak just shy of 142.00 after having visited 137.25 just 10 days ago.
The weakening of the Yen comes ahead of the Bank of Japan’s (BoJ) monetary policy meeting this Friday.
The BoJ currently have a policy rate of -0.10% and is maintaining yield curve control (YCC) by targeting a band of +/- 0.50% around zero for Japanese Government Bonds (JGBs) out to 10 years.
Speculation has been rife that BoJ Governor Kazuo Ueda might look to tweak YCC this year but the timeline for such a move, should it happen, remains opaque. This has led to market uncertainty around monetary policy and by extension, notable moves in USD/JPY.
Former BoJ Deputy Governor Masazumi Wakatabe spoke on Bloomberg television today and highlighted that clear communication is something that he thinks Governor Ueda has been trying to address.
The latest Japanese inflation read of 3.3% year-on-year is well above the 2% inflation target. The concern for the central bank is the sustainability of maintaining at such levels.
A hawkish turn too soon could steer the world’s third-largest economy back toward deflation, something that has periodically undermined the economy for decades.
Ahead of the BoJ gathering is the Federal Open Market Committee (FOMC) meeting on Wednesday, with interest rate markets looking for a 25 basis point lift in the target rate.
Once again, the language from Fed Chair Jerome Powell in the post-decision presser will be closely scrutinised for guidance of the Fed’s rate path.
US inflation has been decelerating in the last few months and this has led to speculation that there could be an easing of the hawkish rhetoric from the bank.
The implication for Treasury yields from the Fed’s conclave may impact USD/JPY. Looking at the spread between the US 10-year bond and same tenor JGB, a significant move in Treasury yields might see more volatility for USD/JPY.
USD/JPY AND YIELD SPREAD BETWEEN TREASURIES AND JGBS
--- Written by Daniel McCarthy, Strategist for DailyFX.com
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.