Japanese Yen Drops as BOJ Keeps Policy Settings Unchanged: Where To For USD/JPY?

The Japanese yen fell after the Bank of Japan’s (BOJ) left ultra-loose policy settings unchanged, especially the closely watched yield curve control (YCC) policy but removed its forward guidance that pledged to keep interest rates at current or lower levels. About an hour before the release of the BOJ rate decision, USD/JPY had been volatile after Nikkei reported that the BOJ will forego revising YCC but was considering changing expression in forward guidance regarding the possibility of easing policy further. USD/JPY 5-minute Chart Market expectations had been subdued going into the meeting after Japan’s new central bank governor Kazuo Ueda, at his inaugural press conference earlier this month, stressed they are in no rush to alter the ultra-accommodative policy settings, including yield curve control (YCC). However, some were expecting tweaks in the forward guidance as a way to prepare markets for an eventual exit from its massive stimulus. Given that the BOJ is no stranger when it comes to offering surprises, one-week USD/JPY risk reversals have been heavily skewed in favour of JPY, suggesting that the options market was positioned for hawkish outcomes. The central bank surprised in December by raising the upper limit of its YCC band, and in January the bank stood pat when some had expected the YCC band to be widened further.

USD/JPY 1-Week 25-Delta Risk Reversals

Japan inflation continues to be above BOJ’s 2% target – data released last week showed CPI softened to 3.2% on-year in March from 3.3% in February. The new governor’s argument for keeping the ultra-easy policy intact is that recent inflationary pressures have been cost-push driven and will prove to be transitory. Also, Ueda earlier this month said big changes to YCC should be decided by looking at economic, price, and financial trends. At the same time, he said the BOJ should avoid being too late in normalizing monetary policy, keeping the door open for policy tweaks at the June meeting. Focus now shifts to US PCE price index data later today, the US FOMC meeting on May 3 and the ECB meeting on May 4. Whether USD/JPY’s jump is sustainable or not would depend on the Fed’s tone at its meeting next week.

USD/JPY Daily Chart

On technical charts, USD/JPY has essentially been directionless in recent weeks, though the broader picture remains bearish, as highlighted in recent updates. See “Time for the Japanese Yen to Rise? USD/JPY, EUR/JPY, AUD/JPY Ahead of BOJ”, published April 21, and “Japanese Yen Weekly Forecast: Bullish Triangle or Double Top for USD/JPY?”, published April 17. Zooming in smaller timeframes, USD/JPY appears to be driven by cross currents – the pair has had a slight upward bias since the end of March, as reflected by the upward-sloping channel on the 240-minute chart. Most recently, it has slipped within a downtrend channel since mid-April.

USD/JPY 240-minute Chart

Unless the pair breaks above a horizontal trendline from March at about 135.00 on the upside, or the mid-April low of 132.00 on the downside, the path of least resistance could be sideways. A decisive break above 135.00 could open the way toward the March high of 138.00, while any break below 132.00 could expose downside risks toward the January low of 127.20.

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