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Yen falls under BOJ’s protectionist stance, carry trade booms -by Ecork

Bank of Japan meeting, USD/JPY news and analysis

  • The Bank of Japan is unaffected – maintain a peaceful policy despite widening spreads
  • USD/JPY: Key technical levels analyzed in the wake of the BoJ meeting
  • Key Event Risks: BoJ Minutes, Japan Inflation and Jerome Powell’s Speech

The Bank of Japan does not act – maintains a pessimistic policy despite widening price discrepancies

The Bank of Japan (BoJ) announced that there was no change in the interest rate as expected, and continued to stress that it will “closely monitor” the impact of sharp moves in foreign currencies with respect to their impact on the domestic economy. The Bank of Japan once again committed to unlimited purchases of Japanese 10-year government bonds to drive the yield toward the zero percent target, with a vote of 8-1.

In essence, the yen is now less attractive from a fundamental perspective, with major central banks such as the Federal Reserve and the Bank of Canada forecasting a strong rally, aiming for more. The widening interest rate divergence across the board highlights a larger “carry trade” opportunity as investors and traders may look to borrow the lower-cost yen in favor of higher-yielding currencies such as the US and Canadian dollars.

USD/JPY: Analysis of the Key Technical Levels

In a somewhat bizarre move, the dollar saw a two-day drop on the back of a strong 75 basis point rise on Wednesday, lifting weak currencies like the yen. As such, we saw a move towards the previous high at 131.35 before returning to the long-term uptrend.

The 4 hour chart highlights the big movement before, during and after the announcement as it gained momentum. The BoJ’s commitment to its dovish/supportive stance has given way to “buy on dip” sentiment as the deepening of interest rate differentials moves the USD/JPY bullish.

4-hour chart of USD/JPY

Source: TradingView, prepared by Richard Snow

daily chart The rejection appears at 131.35 and the follow-up above 133.20. A retest of 135.00 may prove to be a very distant extension towards the end of the week but remains a strong possibility at the beginning of next week. Should the bullish momentum continue, USD/JPY will look to levels last seen in 1998 (136.80 and 139.26). Support comes in at 133.20, followed by 131.35 and 130 flats.

USD/JPY daily chart

USD/JPY last trade: Yen slips on pessimistic BoJ stance, longs boom

Source: TradingView, prepared by Richard Snow

Important events in the future

Next week will be somewhat light on the economic calendar but will have an important Japanese inflation reading on Friday. The Bank of Japan stated that the inflation rate in the near term is expected to remain above 2% but that it expects inflationary pressures to subside by the end of the year. However, persistent upward surprises in inflation will increase pressure on the Bank of Japan and the Japanese government as household incomes are squeezed more tightly. Watch for any reaction from Tokyo or the Bank of Japan if inflation exceeds expectations.

In addition, Fed Chairman Jerome Powell is scheduled to speak later today at 12:45 (GMT) and the minutes of the BoJ meeting will be made available on Wednesday next week.

USD/JPY last trade: Yen slips on pessimistic BoJ stance, longs boom

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Written by Richard Snow for DailyFX.com

Connect with Richard and follow him on Twitter: Tweet embednowFX

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