JPY, USD/JPY, Bank of Japan – Market Alert
- USD/JPY rises as Bank of Japan defends easy policy, not the yen
- The central bank only delivered some verbal punches against the currency
- All eyes are now on the Japanese CPI next to see if price pressures will rise
The Japanese yen came under pressure initially as the Bank of Japan kept policy unchanged in June. Benchmark lending rates and the 10-year government bond yield remained at -0.1% and 0%, respectively. This was not a surprise. Instead, markets were looking to see if the central bank would start shifting its forward guidance amid a weak currency and rising domestic inflation.
With the Bank of Japan interest rate decision approaching, the implied volatility in the USD/JPY pair rose overnight to the highest level since March 2020. This reflected increased demand for hedging from the pair’s daily moves. An unexpected rate hike from the Swiss National Bank may have played a role here, possibly raising the stakes for Mr. Kuroda to follow in his footsteps.
And volatility is what we got as you can see in the reaction below. USD/JPY initially made a comeback before taking a swing in the following minutes.
JPY and USD/JPY Reaction to the Bank of Japan in June
Chart created with TradingView
The Bank of Japan remains committed to a very loose policy
It was not only traders watching the yen, but the Bank of Japan itself. The rapid depreciation of the Japanese yen was noted as an economic headwind by Governor Haruhiko Kuroda earlier this week. That would be “negative for the economy,” he said. For the island nation’s economy that buys goods abroad, especially energy, a weak yen may cause the country to import inflation and raise the consumer price index.
In a rare incident, the central bank indicated that it “needs to pay due attention to currencies and markets.” However, outside of verbalization, explicit reference to interference was noticeably absent. Instead, the central bank appears committed to defending its ultra-loose policy. Mr. Kuroda said the central bank would “add to easing without hesitation if needed”. This could leave the yen vulnerable to a continuing divergence between the central bank and its major peers, who are becoming increasingly hawkish.
With that in mind, the next Japanese inflation report is due next week on June 23research and development It is 23:30 GMT. A strong reading could result in some volatility in the Yen. One-week implied volatility for USD/JPY lies around 20.90, the highest level since March 2020. If the last remaining pessimistic major central bank collapse is expected, that also does not bode well for market sentiment, which is something the risk-averse currency will surely do. … appreciate.
USD/JPY Technical Analysis
USD/JPY recently rejected the 2002 high, and established immediate resistance at 135.16 – 135.56. It left prices behind and confirmed a bearish engulfing, which opened the door for a reversal. With that said, the uptrend line from March continues to maintain the uptrend. It will only start to look more neutral if the pair breaks below the trend line. Otherwise, an extension of the gains will expose the 78.6% Fibonacci extension at 139.67 before the 100% level at 143.30 comes into play.
USD/JPY daily chart
Chart created in TradingView
– By Daniel Dobrovsky, strategic for DailyFX.com
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