Yen retraces gains as markets look to BOJ for clues about next rate hike
The Bank of Japan (BOJ) is expected to keep policy unchanged when it meets this week, leaving the key policy rate at 0.5%. Instead, the markets are looking for guidance about the timing of the next potential interest rate hike.
The markets look for clues about the next BOJ hike
Japan’s economy has proven to be resilient. Upward pressures on growth and prices remain as inflation accelerates further above the BOJ’s 2% target. The latest inflation figures revealed national core CPI rose to 3.2% y/y in January, with forecasters predicting a modest decrease in the upcoming February data – which is released a day after the BOJ meeting – to 2.9%.
(Source: Trading Economics)
The so-called “virtuous cycle” between incomes and prices, something the BOJ has long tried to generate, continues to unfold in Japan. The dynamic looks likely to continue too, with recent wage negotiations between unions and corporates leading to another substantial increase in average worker pay of 5.46%.
Despite the upside risks to inflation, the BOJ is expected to maintain its typically cautious approach to policy. Recent commentary from the central bank suggests that it wishes to gauge the impact of last meeting’s cut as well as assess the signs of weaker global economic activity driven by US trade policy uncertainty.
Another interest rate move from the BOJ remains a matter of when and not if for policymakers and the markets alike. The BOJ stated at its last meeting that, with real rates still negative, policy settings are still accomodative. Swaps markets have another hike this year fully baked into the curve, with a hike completely priced in for the October meeting.
(Source: Bloomberg)
The USD/JPY retraces heading into BOJ and FOMC decisions
The Yen is rising heading into the Bank of Japan meeting as the markets lower the probabilities of a “hawkish hold” and yield spreads reverse slightly between JGBs and US Treasuries, primarily as some of the trade war anxiety subsides. Volatility in the USDPY will also be influenced by a US Federal Reserve meeting this week, with the markets looking out for guidance about the central bank’s next rate cut.
Technically speaking, the USDJPY remains in a clearly defined downtrend. However, momentum is reversing in the very short-term, with the market potentially eyeing downward sloping trendline support from here. A break below the most recent lower-low around 146.50 would indicate the pair is potentially poised to extend its downtrend.
(Source: Trading View)
(Past performance is not a reliable indicator of future results)