USDJPY Analysis and Talking Points
- BoJ Disagree on Tolerance for Yield Movement
- BoJ Had Planned to Hike Rates Twice This Year
See our Q3 JPY forecast to learn what will drive the JPY through the quarter.
BoJ Disagree on Tolerance for Yield Movement
Overnight the Bank of Japan released the summary of opinions from its monetary policy meeting last week. One thing that was made apparent from the report was that a divide is beginning to show among board members amid disagreements on how far yields should be allowed to move from the central bank's target. At the post-meeting, Governor Kuroda stated that long-term yields are to move at double the previous range of -0.1%-0.1%. However, one member stated that the BoJ should allow for yields to move by around 0.25%. Another board member had warned that by allowing yields to move when inflation expectations remain subdued could result in lower price growth.
Following last week's announcement, markets have pushed long-term bond yields to the highest level since 2016 as they test the BoJ's new limit, which in turn has supported the Japanese Yen and will continue to underpin the currency.
BoJ Had Planned to Hike Rates Twice This Year
In an interview with Reuters, people familiar with the Bank of Japan's thinking had noted that the central bank had planned to make an announcement to lift rates, however, market volatility at the beginning of the year had prevented such action. Additionally, the bank had hoped to signal a move higher in rates last month with a view to raise them in September, although, the persistent low inflation levels in Japan had also stopped this idea. Overall this shows that the BoJ is becoming less dovish with this view supported by last week's policy tweaks.
Where Next for USDJPY?
According to IG Client Positioning d ata shows 58.6% of traders are net-long with the ratio of traders long to short at 1.42 to 1. In fact, traders have remained net-long since Jul 23 when USDJPY traded near 111.374; price has remained unchanged since then. The number of traders net-long is 3.8% lower than yesterday and 4.3% higher from last week, while the number of traders net-short is 1.2% lower than yesterday and 6.5% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDJPY prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USDJPY trading bias.
USDJPY PRICE CHART: Daily Time Frame (March-August 2018)
USDJPY is trading heavy today having dipped below 111.00. Key downside levels to watch is 110.50, whereby a break below could open the gate for larger losses in the pair. Alongside this, USDJPY long positioning also remains at extreme levels, with longs valued at $7.65bln, consequently suggesting that the pair is vulnerable to short squeeze.
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--- Written by Justin McQueen, Market Analyst
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