USD/JPY awaits BOJ meeting and US jobs data
14:52, 7 March 2023
Most traders will likely have this Friday as a key date marked on their calendars as we’ll get further insight into the US economy through the February jobs data, a highly anticipated market event. But it is not the only one, as on Friday we’ll have the Bank of Japan (BOJ) delivering their March monetary policy updates, in what will be Governor Kuroda’s last meeting. USD/JPY is likely to experience heightened volatility heading into Friday as the day will bring momentum to both side of the pair.
BOJ meeting and leadership change
If one thing has characterised Kuroda has been consistency. Since the inception of the yield curve control (YCC) program in 2016 - which has seen the BOJ buying 10-year bonds to keep their yield below a certain threshold - the bank has kept a consistent interest rate at -0.1%, in what is likely the most boring chart in finance.
Japan interest rate (2015-2023)
Whilst other central banks around the world have been fiercely hiking rates to combat soaring inflation, the BOJ kept everything untouched throughout most of 2022. In December we saw the YCC band increase unexpectedly from 0.25% to 0.50%, which breathed some life into the Japanese Yen (as can be seen in the chart below when USD/JPY dropped 3.8% on the day)
Japanese 10-year bond yield vs USD/JPY
So what can we expect at Kuroda’s last meeting? Well, there has been speculation in recent weeks about the possibility that he could widen the YCC bands to make the transition smoother for incoming Governor Kazuo Ueda, who will face increased pressure to tighten monetary conditions as CPI came in at 4.3% in January, following a steady rise in recent months. In all honesty, the likelihood of this happening is pretty slim, but we may see some repricing in Japanese yields if it doesn’t, given expectations, which could weigh on the Yen on Friday.
If we look at recent comments from Ueda we can see that he believes an accommodative monetary policy is necessary for the time being. In fact, the surprise appointment of Kazoo Ueda a few weeks back saw some renewed momentum for the Japanese Yen as he is perceived to be less dovish than Deputy Governor Masayoshi Amamiya, who was believed to be the likely replacement. So far, his comments do not resonate with this view but some analysts believe this could be a strategic play to ensure markets don’t anticipate a change to the yield curve control (YCC) bands or any other parts of monetary policy which could create another round of selling in Japanese bonds.
What is your sentiment on USD/JPY?
US jobs data: the stakes are high
After seeing the unemployment rate drop to the lowest level since 1969 in January traders are looking to see whether the first reading of the year was an outlier, skewed by seasonality effects, or an early sign that the US jobs market is going to remain tight throughout 2023. We know the Fed is keeping a close eye on this data as time and time again it has emphasised the need to see the jobs market untightening before any adjustments can be made to monetary policy to become more accommodative.
The unemployment rate is expected to remain unchanged at around 3.4% whilst consensus forecasts are showing the NFP coming in around the 200k mark, which to be honest is a pretty stale attempt at prediction given it is the long-term average forecast. I think given last month’s reading and the recent consumer sentiment data there will be a fair amount of expectations to see another strong reading in February, which would see the US dollar pushing higher once again and the stock market undoing some of the recent gains. Given this situation, risk is skewed to the
upside for risk appetite if we do indeed see an underwhelming data release, whether it be very limited job creation or an uptick in unemployment, meaning the dollar could deepen the recent downtrend, allowing stocks and dollar-denominated commodities to take advantage and push higher.
USD/JPY technical analysis
The bullish advance in USD/JPY has been halted in recent days as a bearish moving average cross offered a short-term ceiling for the pair. The 100-day SMA (136.376) is now hovering below the 200-day SMA (137.387) for the first time since April 2021 when the pair really took off to the highs seen in October last year. It’s likely that this pattern will continue offering resistance in the medium to long-term but given we also have a bullish cross in short-term moving averages (20- day above the 50-day) then we may see some fresh highs along the way before reversing lower.
For now, the last few days have lacked clear momentum which has led USD/JPY to consolidate sideways, as with most of the market given the confusion around the outlook of the US economy and therefore trading sentiment. It looks like the pasta of least resistance could be turning lower once again but bears should be cautious as we have a dovish BOJ keeping the lid on Yen gains, all whilst the US dollar may have a little more drive to give. A break above 138.119 should be indicative of further bullish momentum whilst a break below 134.07 could restart the selling momentum.
USD/JPY daily chart