The recent downturn in the USD/JPY pair due to the yen’s strength, driven by speculation about the Bank of Japan’s potential tightening of monetary policy.
The recent upswing in the yen’s strength has triggered a substantial downturn in the USD/JPY pair, breaching the critical 146.00-level and falling below the support established by the December 4th low at 146.23. This market shift is rooted in heightened speculation among market participants, driven by the anticipation that the Bank of Japan (BoJ) may contemplate tightening its monetary policy as early as the impending meeting on December 19th.
Overnight reports unveiled that BoJ Governor Ueda engaged in discussions with Prime Minister Kishida, specifically on monetary policy, in preparation for the December meeting. Sources like Bloomberg indicate that Governor Ueda dived into conversations with the prime minister, addressing the economic landscape and underscoring the careful monitoring of wages and their potential impact on prices. It is noteworthy that Governor Ueda clarified that such meetings between a BoJ Governor and the prime minister are routine occurrences, taking place multiple times a year.
In addition to these interactions, Governor Ueda seized the opportunity to address parliament, presenting a semi-annual report on currency and monetary control. Throughout this discourse, he reaffirmed the commitment to achieving the inflation goal while sustaining an accommodative policy to bolster wage growth. Despite acknowledging the existence of various options for the policy rate in the event of an increase, he refrained from specifying a particular new rate level.
Although discussions hinted at the prospect of an exit from the negative rate policy, Governor Ueda’s comments did not indicate an imminent move in that direction this month. He underscored the significance of effective communication before implementing any changes, suggesting that it might be premature for an exit simulation. Nevertheless, the prevailing unease surrounding the potential departure of the BoJ from a negative rate policy has evidently impacted the Japanese Government Bond (JGB) market overnight. The 10-year JGB yield experienced a notable increase of around 10 basis points, marking the most significant surge in a year. Additionally, the latest 30-year JGB auction witnessed the lowest bid-cover ratio since 2015.
These recent market dynamics align with our existing short USD/JPY trade idea. Our analysts had previously anticipated the BoJ’s potential exit from the negative rate policy in January, aiming to reduce policy divergence with other major central banks. The recent downward trajectory of USD/JPY is primarily attributed to decreasing US yields, prompted by market participants adjusting their expectations for earlier and more substantial Fed rate cuts in the upcoming year. The release of the weaker-than-expected ADP survey for November, indicating a modest increase of only 103k in private employment, has further fuelled these expectations. However, it’s crucial to note that doubts persist regarding the accuracy of the ADP survey as a reliable leading indicator for broader payroll figures.
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