- BoJ manages to upset the market even with historic hike
- Yen tumbles to 34-year low even as market prices in summer hike
- Will another disappointment trigger yen intervention?
- The Bank meets on Friday at 03:00 GMT
To stand pat after historic hike
The Bank of Japan (BoJ) is very likely to keep interest rates untouched on Friday following a historic decision last month to take borrowing costs out of negative territory and to abolish its yield curve control policy.
However, even that historic move came as a disappointment to investors who continued selling the yen and triggering intervention warnings by Japanese authorities. Back then, the Bank said that they will continue buying bonds with broadly the same amounts as before, while Governor Ueda noted that they will maintain accommodative policy conditions, and thus market participants continued to believe that any subsequent hikes will be very gradual and slow. Just after the decision, they were expecting the next 10bps hike to be delivered in September or October.
Yen, Ueda, inflation, and wages
Although the market brought forward that timing to July, the yen continued to tumble, with dollar/yen flirting for more than a week now with the 155.00 psychological zone. Initially, Governor Ueda said that the central bank would not directly respond to currency moves, but on Thursday he appeared a little bit more hawkish, noting that the central bank may raise interest rates again if the yen’s declines result in accelerating inflation, adding that they could begin reducing their huge bond buying at some point in the future.
Inflation data showed that both the headline and core CPI rates rebounded strongly in February. Although they ticked down in March, the rebound in February and the yen’s depreciation suggest that the Bank may revise upward its inflation projections.
Taking all that into account, and also that the spring wage negotiations concluded with the nation’s biggest companies agreeing to the heftiest pay hikes in 33 years, investors may be on the lookout for any clues and hints about how likely a summer hike is.
BoJ tends to upset market expectations
Having said all that though, the BoJ has been disappointing hawkish market expectations for a while now, and if this is the case on Friday as well, the yen is likely to continue losing ground against the greenback, especially if this week’s US data weigh further on Fed rate cut expectations.
A break above 155.00 may revive concerns about intervention by Japanese authorities, if they don’t act already of course. However, a closer examination of the officials’ stance suggests that they could wait for a while longer before opening the discussion about intervening again as they have been repeatedly highlighting that they will respond if the moves are speculative and do not reflect fundamentals. Indeed, they have been quiet lately as the latest leg south in the yen was driven by fundamental forces.
Will dollar/yen aim for 160.00?
From a technical perspective, dollar/yen has been printing higher highs and higher lows since December 28, while a longer-term uptrend is marked by a valid trendline drawn from the low of January 16, 2023.
Currently, the pair is trading just a hair shy of the psychological 155.00 barrier, the break of which may encourage the bulls to extend their march towards the 161.8% Fibonacci extension level of the November 13 – December 28 correction, at around 159.00. The next level to consider as resistance may be the round number of 160.00.
On the downside, a decisive break below the crossroads of the 150.80 barrier and the upside support line drawn from the low of December 28 may invite more bears into the game, but it would still be premature to call for a full-scale reversal as the pair would still be above the longer-term uptrend line that’s been intact for more than a year.
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