The dollar-yen pair tested the psychologically important price level of 130.00 today, temporarily falling to the area of the 129th figure. The pair has updated a six-month low, but this is not surprising: USD/JPY bears consistently develops a downward trend. Looking at the weekly chart, we can see that the price is now declining as part of the next wave of downward movement.
Three weeks ago, the Bank of Japan provoked price turbulence, which turned out to be in favor of the national currency. In general, the downward rally began in October last year, when the pair reached a multi-year price high (151.96). After that, the Japanese authorities conducted another currency intervention, thereby extinguishing the upward impulse. And further events also turned out to be in favor of sellers: the dollar weakened against the backdrop of slowing inflation in the U.S. and a decrease in the Fed's aggressiveness, while the yen received unexpected support from the Japanese regulator. And all this happened and is happening against the background of a kind of "election race" for the post of head of the Bank of Japan: traders react to statements by possible successors of Haruhiko Kuroda (as a rule, these statements are quite hawkish). At the same time, the dovish statements of Kuroda himself, who is guaranteed to leave his position in April, are ignored by market participants.
And now the yen, after a short respite in the pre-New Year period, continues to strengthen its position due to several fundamental factors.
First, there is growing confidence in the market that the Bank of Japan, having doubled the yield ceiling on 10-year bonds in December, has taken only the first step towards normalizing monetary policy. Last week, on New Year's Eve, Kuroda refuted this assumption. He stated that this decision of the central bank was due to "market and technical reasons." But traders, apparently, are betting that the regulator will further weaken its policy of controlling the yield curve in the future or abandon it altogether. The market is increasingly talking about the possible implementation of such a scenario.
In particular, Columbia University professor Takatoshi Ito (who worked with Kuroda at the Japanese Ministry of Finance in 1999–2001) recently said that such a decision by the central bank is a kind of prelude to the rejection of ultra-loose policy. He did not agree with the current head of the central bank that inflation in Japan will slow down this year. Arguing his position, Ito points to the latest data on the growth of the consumer price index: in November, annual consumer inflation reached 2.8%, even without taking into account energy and food prices. This means that inflation may remain above the 2% target level in 2023, even if prices for energy resources and products stop rising. Moreover, according to Ito, this year's wage negotiations are likely to lead to significant increases, boosting consumers' purchasing power, triggering another spike in prices, due to stronger demand.
By the way, Takatoshi Ito is one of the candidates to replace Kuroda as head of the Bank of Japan.
Other likely successors to Kuroda are also saying in one form or another that the Japanese regulator may have to take the next steps towards normalizing monetary policy. In particular, former Vice Finance Minister for International Affairs Takehiko Nakao said that he favors a smooth transition from the central bank's ultra-loose monetary policy.
In my opinion, the market has formed a common position on the interpretation of the December decision of the Japanese Central Bank. And this position boils down to the fact that at the end of last year, the Bank of Japan marked the beginning of the end of the ultra-loose monetary policy. In turn, "hawkish" comments of Kuroda's possible successors are further confirmation of this assumption. The yen is in high demand on the back of such conclusions.
Also, we should not forget that Japanese currency has a status of a "safe-haven," so a negative news flow from China provides indirect support for USD/JPY bears. On Saturday, it became known that China's official Manufacturing PMI for December dropped to 47.0, contrary to expectations of a 48-point decline. As we know, the 50-point mark separates contraction from growth, while the Manufacturing PMI has been below the key level for the third consecutive month. China's Caixin Manufacturing PMI, released today, fell to 49.0 (with a forecast of a decline to 49.4). Economists polled by Reuters said the worsening epidemiological situation in China could lead to temporary labor shortages and increased supply chain disruptions. Meanwhile, a new wave of coronavirus infection is spreading in China at an unprecedented rate.
Thus, the existing fundamental background contributes to the further decline of the USD/JPY pair. Today, traders tested the 129.50 support level (the lower line of the Bollinger Bands indicator on the daily chart), but then retreated to the area of the 130th figure. There is no doubt that the bears will again storm this price barrier in the medium term, overcoming which will open the way for them to the next support level at 129.00 (the lower Bollinger Bands line on the H4 timeframe).
Relevance up to 09:00 2023-01-04 UTC+1 Company does not offer investment advice and the analysis performed does not guarantee results. The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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