Bank of Japan disappoints Yen bulls

• Today, Bank of Japan offered zero guidance on rate hike in 2024
   
• USDJPY climbs well past 200-day SMA
   
• Higher-than-expected Japan CPI this Friday may see USJPY test 200-day SMA for support
   
• Lower-than-expected Japan CPI may see USDJPY test 21-day SMA for resistance
   
• Bloomberg model: 74% chance USDJPY will trade between 142.23-146.36 this week

 

Today, the BoJ maintained its benchmark rate at minus 0.1%, and made no changes to its yield curve control programme.

More disappointingly for JPY bulls (those hoping prices would move higher) …

the Japanese central bank failed to offer any hints of a rate hike in 2024.

This keeps Japan as the last economy that’s still holding on to negative interest rates (-0.1%).

 

How did the Yen react?

The absence of any “hawkish” clues prompted the Japanese Yen to weaken.

USDJPY surged above its 200-day simple moving average (SMA - a widely followed technical indicator).

The BoJ’s signal today, or lack thereof, also further fuelled the technical rebound in USDJPY, with the latter’s 14-day relative strength index (RSI) having broken below the 30 mark and into “oversold” territory.

NOTE: From the textbook perspective of technical analysis, an asset’s prices tends to rebound once its 14-day RSI breaks below 30.

 

In fact, at the time of writing, JPY is currently weaker against all of its G10 peers.

NOTE: Markets tend to boost the currency if they believe that economy's interest rates are going to move higher, and vice versa.

 

How low could JPY go?

Perhaps not much, as long as markets can continue to hope for a BoJ rate hike in 2024.

And the earlier the better for Yen bulls.

To be clear, markets are still expecting the BoJ to exit its negative interest rates regime and finally jump on the rate-hike bandwagon in April.

Markets are still predicting an 86% chance of such an event, though those 86% odds are slightly lower compared to the 94% chance given prior to today’s BoJ policy decision.

As long as markets continue to hope for a BoJ rates liftoff, that should keep the Yen supported and limit its downside in the interim.

After all, Japan’s headline inflation (as measured by the consumer price index – CPI) has remained consistently above the BoJ’s target of 2% since April 2022.

Evidently, the BoJ wants to get further confirmation that inflation will remain sticky above 2%, before exiting its negative interest rates regime.

So with that in mind …

 

Look out for the next Japan inflation numbers due Friday (Dec 22nd)!

Economists are forecasting that Japan’s national CPI (consumer price index – which measures inflation) rose by 2.8% year-on-year (November 2023 vs. November 2022).

If so, that would be slightly lower than October’s 3.3% year-on-year CPI figure; but 2.8% is still well above the BoJ’s 2% inflation target.

 

How might JPY move before Christmas?

Bloomberg’s FX forecast model predicts a 74% chance that USDJPY will move between 142.23-146.36 this week.

• If Japan’s national CPI this Friday comes in above the market-expected 2.8%, paving the way for a BoJ rate hike, that could see USDJPY re-testing its 200-day SMA for support.
  
  A daily close below the 200-day SMA may restore USDJPY to revisit the recent cycle low at 140.943 going into the new year.​​​​​​​

 

• However, a lacklustre CPI figure this Friday that pushes back forecasts for a BoJ rate hike even further may extend USDJPY’s recovery.
  
  JPY bulls may be enticed into testing this FX pair’s 21-day SMA for resistance before the long Christmas weekend.