Why Hasn’t the Japanese Yen Broken Higher Yet?
Fundamental Forecast for Japanese Yen: Neutral
- Japanese Yen trades at critical resistance versus dollar (USDJPY support)
- Coming week’s key US Federal Reserve and Bank of Japan meetings could force breakouts
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The coming week could help answer that question as both the US Federal Reserve and Bank of Japan will release their monetary policy decisions. Given that the USDJPY stands just above its 200-day Simple Moving Average and an important 8-month trendline, we suspect that any important surprises out of either central bank might just be enough to force the breakdown.
Traders had previously pushed the Japanese Yen sharply lower (USDJPY higher) on expectations that BoJ Quantitative Easing policies would devalue the currency, but a relative stabilization in Japanese inflation may limit Governor Kuroda’s ability to effect further easing. Markets are pricing in very little chance of a major shift from the Bank of Japan, and as such their upcoming decision may pass as a non-event.
The US Federal Open Market Committee is similarly unlikely to announce any policy changes, but that doesn’t mean we can’t see sharp reactions from the US Dollar. Traders are looking for the first clues on when the Fed will begin the so-called “Taper” of its Quantitative Easing policies, and even minor changes in the FOMC statement could elicit reactions.
A pullback in Fed Tapering expectations has forced US bond yields and the USDJPY substantially lower, and the key question is whether Fed guidance can resurrect sagging interest rate expectations. Expect any explicit references to concrete taper timelines to have the clearest effects on rates and the USDJPY, while the lack of any taper talk could help force the Dollar to further lows.
Currency volatility remains extremely low, and traders are not pricing in a Japanese Yen breakout. Of course, that might be exactly what makes it more likely—there’s plenty of scope for surprises out of the BoJ and FOMC meetings. The USDJPY will likely respond in kind. - DR
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