USD/JPY: Inflation Decides Everything
During the first half of the week, the yen, like other currencies in the DXY basket, retreated under the pressure of the dollar, and the USD/JPY pair reached a high of 143.88. However, then the Bank of Japan (BoJ) came to the aid of the national currency.
We reported in our last review that for the first time in many years, the new head of the Bank, Kazuo Ueda, decided to turn the rigid targeting of the yield curve into a flexible one. The target level of yield on Japanese 10-year government bonds (JGB) remained the same, 0%. The allowable yield fluctuation range of +/-0.5% was also maintained. But from now on, this limit was no longer to be seen as a rigid boundary but became more flexible. Of course, within certain limits – the Bank of Japan drew a "red line" at the 1.0% level and announced that it would conduct purchase operations to keep the yield from rising above this mark.
And now, less than a week after this revolutionary step for the BoJ, the yield on JGB reached nine-year highs near the 0.65% mark. As a result, the central bank hurried to intervene, and to avoid further growth, it conducted an intervention by buying these securities, thereby supporting the yen.
The Japanese currency received further support on Friday, August 4th, due to weak data on the NFP in the USA. As a result, the week's finish for USD/JPY was at the level of 141.73.
There is no doubt that inflation data will be crucial for central banks and, in turn, for currency markets. At the moment, there is much evidence that inflation in Japan will continue to rise. A few days ago, the country's government recommended a 4% increase in the minimum wage, and spring wage negotiations secured the highest wage growth in the last three decades. Against this backdrop, there is increasing evidence that businesses are ready to pass this growth on to consumers, leading to a rise in the Consumer Price Index (CPI). This trend reflects a willingness among Japanese companies to respond to growing labour costs by increasing prices, potentially fuelling inflation. In turn, this may have an impact on the Bank of Japan's policy decisions and influence the value of the yen in currency markets. The situation clearly highlights the interconnectedness of labour markets, monetary policy, and currency value, and underscores the importance of closely monitoring economic indicators and central bank actions.
To combat rising prices, the Bank of Japan's (BoJ) counterparts in the U.S. and Europe are tightening monetary policy and raising interest rates. Analysts at the Dutch Rabobank are hoping that the BoJ will finally follow suit and gradually move away from its ultra-soft policy. As a result, they anticipate that the USD/JPY exchange rate could return to the 138.00 mark within a three-to-six-month period.
The view of strategists at Japan's MUFG Bank is less optimistic. They write, "Currently, we forecast the first rate hike by the Bank of Japan in the first half of next year. The shift towards tightening BoJ policy supports our forecast of yen strengthening in the coming year." As for the recent change in the yield curve control policy, MUFG believes that it alone is insufficient to cause a recovery of the Japanese currency.
Economists at Germany's Commerzbank and Finland's Nordea Bank agree that if the Japanese regulator manages to tame inflation, the yen's exchange rate should rise. However, changes in the Bank of Japan's policy will not happen quickly. Therefore, according to many specialists, significant shifts can only be expected around 2024.
The various views and forecasts presented highlight the complexity of the economic environment and the challenges of predicting monetary policy changes and currency movements. The situation in Japan is particularly nuanced, given the BoJ's long-standing struggle with deflation and its commitment to an extremely accommodative monetary stance. Market participants and policymakers will need to pay close attention to a range of economic indicators, central bank signals, and global economic trends to navigate the evolving landscape.
As for the analysts' short-term forecast, it offers no clear direction. A third of them believe the USD/JPY pair will move north in the coming days, a third expect it to move south, and the final third anticipate a sideways or "east" movement. The indicators on the D1 timeframe look as follows:
Oscillators: 75% are coloured green, and 25% are neutral grey. Trend indicators: The greens have a clear advantage, with 85%, and the reds account for only 15%.
The nearest support level is positioned at 141.40, followed by 140.60-140.75, 139.85, 138.95-139.05, 138.05-138.30, 137.25-137.50, 135.95, 133.75-134.15, 132.80-133.00, 131.25, 130.60, 129.70, 128.10, and 127.20. The nearest resistance stands at 141.20, then 142.90-143.05, 143.75-144.04, 145.05-145.30, 146.85-147.15, 148.85, and finally, the October 2022 high of 151.95.
Given the divergent opinions of analysts and the varying readings of the technical indicators, market participants should approach this currency pair with caution. A careful examination of upcoming economic data releases, central bank statements, and other fundamental factors could provide additional insights into the likely direction of USD/JPY.
No significant information concerning the Japanese economy is expected in the upcoming week. Traders should be aware that Friday, August 11, is a holiday in Japan, as the country observes Mountain Day.
continued below...
During the first half of the week, the yen, like other currencies in the DXY basket, retreated under the pressure of the dollar, and the USD/JPY pair reached a high of 143.88. However, then the Bank of Japan (BoJ) came to the aid of the national currency.
We reported in our last review that for the first time in many years, the new head of the Bank, Kazuo Ueda, decided to turn the rigid targeting of the yield curve into a flexible one. The target level of yield on Japanese 10-year government bonds (JGB) remained the same, 0%. The allowable yield fluctuation range of +/-0.5% was also maintained. But from now on, this limit was no longer to be seen as a rigid boundary but became more flexible. Of course, within certain limits – the Bank of Japan drew a "red line" at the 1.0% level and announced that it would conduct purchase operations to keep the yield from rising above this mark.
And now, less than a week after this revolutionary step for the BoJ, the yield on JGB reached nine-year highs near the 0.65% mark. As a result, the central bank hurried to intervene, and to avoid further growth, it conducted an intervention by buying these securities, thereby supporting the yen.
The Japanese currency received further support on Friday, August 4th, due to weak data on the NFP in the USA. As a result, the week's finish for USD/JPY was at the level of 141.73.
There is no doubt that inflation data will be crucial for central banks and, in turn, for currency markets. At the moment, there is much evidence that inflation in Japan will continue to rise. A few days ago, the country's government recommended a 4% increase in the minimum wage, and spring wage negotiations secured the highest wage growth in the last three decades. Against this backdrop, there is increasing evidence that businesses are ready to pass this growth on to consumers, leading to a rise in the Consumer Price Index (CPI). This trend reflects a willingness among Japanese companies to respond to growing labour costs by increasing prices, potentially fuelling inflation. In turn, this may have an impact on the Bank of Japan's policy decisions and influence the value of the yen in currency markets. The situation clearly highlights the interconnectedness of labour markets, monetary policy, and currency value, and underscores the importance of closely monitoring economic indicators and central bank actions.
To combat rising prices, the Bank of Japan's (BoJ) counterparts in the U.S. and Europe are tightening monetary policy and raising interest rates. Analysts at the Dutch Rabobank are hoping that the BoJ will finally follow suit and gradually move away from its ultra-soft policy. As a result, they anticipate that the USD/JPY exchange rate could return to the 138.00 mark within a three-to-six-month period.
The view of strategists at Japan's MUFG Bank is less optimistic. They write, "Currently, we forecast the first rate hike by the Bank of Japan in the first half of next year. The shift towards tightening BoJ policy supports our forecast of yen strengthening in the coming year." As for the recent change in the yield curve control policy, MUFG believes that it alone is insufficient to cause a recovery of the Japanese currency.
Economists at Germany's Commerzbank and Finland's Nordea Bank agree that if the Japanese regulator manages to tame inflation, the yen's exchange rate should rise. However, changes in the Bank of Japan's policy will not happen quickly. Therefore, according to many specialists, significant shifts can only be expected around 2024.
The various views and forecasts presented highlight the complexity of the economic environment and the challenges of predicting monetary policy changes and currency movements. The situation in Japan is particularly nuanced, given the BoJ's long-standing struggle with deflation and its commitment to an extremely accommodative monetary stance. Market participants and policymakers will need to pay close attention to a range of economic indicators, central bank signals, and global economic trends to navigate the evolving landscape.
As for the analysts' short-term forecast, it offers no clear direction. A third of them believe the USD/JPY pair will move north in the coming days, a third expect it to move south, and the final third anticipate a sideways or "east" movement. The indicators on the D1 timeframe look as follows:
Oscillators: 75% are coloured green, and 25% are neutral grey. Trend indicators: The greens have a clear advantage, with 85%, and the reds account for only 15%.
The nearest support level is positioned at 141.40, followed by 140.60-140.75, 139.85, 138.95-139.05, 138.05-138.30, 137.25-137.50, 135.95, 133.75-134.15, 132.80-133.00, 131.25, 130.60, 129.70, 128.10, and 127.20. The nearest resistance stands at 141.20, then 142.90-143.05, 143.75-144.04, 145.05-145.30, 146.85-147.15, 148.85, and finally, the October 2022 high of 151.95.
Given the divergent opinions of analysts and the varying readings of the technical indicators, market participants should approach this currency pair with caution. A careful examination of upcoming economic data releases, central bank statements, and other fundamental factors could provide additional insights into the likely direction of USD/JPY.
No significant information concerning the Japanese economy is expected in the upcoming week. Traders should be aware that Friday, August 11, is a holiday in Japan, as the country observes Mountain Day.
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