Yesterday's session was characterized by the rapid and unstable performance of the US dollar currency pair against the Japanese yen USD/JPY. The Japanese central bank abandoned new surprise events for the markets with more signs of tightening its monetary policy. USD/JPY is down to the resistance level of 131.57, before returning quickly to stabilize around the support level of 128.00 at the time of writing.
Yesterday the Bank of Japan fended off intense market speculation of a policy change by stepping up defense of the stimulus framework, which led to sharp declines in the yen and bond yields. In the final decision, Governor Haruhiko Kuroda's board kept its key policy settings unchanged on Wednesday, leaving the negative interest rate at -0.1% and the target for 10-year yields under the Curve Control Program at around 0%, according to its latest statement.
The BoJ said it will continue to buy bonds on a large scale and increase purchases on a flexible basis if necessary because it has shown its intention to stick to the yield curve control program for the time being. It has also ramped up lending to commercial banks in a bid to encourage them to buy more debt - another tactic in his dogged defense of the policy.
Updated forecasts by the Bank of Japan also showed that officials still do not see inflation remaining above 2% in a sustainable way over the coming years, providing justification for continued stimulus even after Kuroda stepped down in April. The earlier-than-expected statement signaled consensus in the BoJ board despite strong market bets that it should be close to succumbing to a policy stance out of sync with key peers including the Federal Reserve and the European Central Bank. and the Bank of England.
Following the decision, the yen fell more than 2% to 131.58 per dollar after the decision, while the benchmark 10-year yield fell more than 10 basis points to less than 0.4% when it reopened from its lunch break. Shares jumped more than 2%.
The Bank of Japan is seen as a small setback for the yen but the pressure on bonds remains. For his part, the BoJ governor reiterated his view that the stimulus framework is not under threat in a post-decision press conference ahead of his visit to the World Economic Forum in Davos, Switzerland. “I think the performance of the bond market will improve in the future, and in that sense, I think yield curve control is quite sustainable,” he said. Kuroda also said that widening the band around the BoJ's yield target is not necessary. He indicated that he would not rule out paying banks to borrow money through the loan provision program. Speculation that the Bank of Japan would take more explicit steps toward policy normalization had intensified after it unexpectedly widened its 10-year yield target range last month, a move that three-quarters of economists surveyed interpreted as a step toward policy normalization.
Since then, Kuroda's massive easing program has been hit by the harshest market attacks in a decade.
Forecasts of the US dollar against the Japanese yen:
- The general trend of the USD/JPY currency pair is still bearish.
- The stability around and below the support level of 128.00 confirms the bears' control over the trend.
- At the same time, it pushes the technical indicators towards oversold levels.
- Thinking about buying the currency pair is more appropriate than selling.
I see that the support levels are 127.55 And 126.70 is more suitable for buying without risk. On the other hand, returning to the vicinity of the resistance 131.50 will be important to break the current bearish outlook.
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