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13.06.2023 05:26 PM
Yen caught in central bank crossfire
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While the Federal Reserve is just getting ready to sit on the sidelines, the Bank of Japan has long been sitting there. Governor Kazuo Ueda has repeatedly stated that he has no intention of abandoning the ultra-loose monetary policy, at least for now. The pause has clearly been prolonged. The longer it lasts, the further the normalization timeline is pushed back. The more Bloomberg experts lean towards the idea that it will occur in the second half of 2023 or later, which is worse for the yen. However, its dynamics are currently determined by external factors.

Forecasts for the normalization of the monetary policy of the Bank of Japan

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The pause of the Bank of Japan differs significantly from the pause of the Federal Reserve. After several consecutive interest rate hikes, the Fed decided to buy time and wait for new data. The futures market on the eve of the June FOMC meeting indicates a 77% probability that the federal funds rate will remain at 5.25%. Federal Reserve Governor Philip Jefferson said the pause in the monetary tightening cycle does not mean its end. The chances of resuming monetary policy tightening in July are 70%.

Much will depend on Fed Chairman Jerome Powell's rhetoric, his hints about future steps by the Federal Reserve, as well as the updated FOMC forecasts on interest rates. They will determine the direction of U.S. Treasury bond yields. A hawkish surprise, combined with the massive $1.1 trillion issuance by the Treasury, will push up debt market rates. This will give a green light to USD/JPY buyers.

However, in the context of the Federal Reserve's monetary policy dependence on data, the direction of U.S. Treasury bond yields will be determined by macroeconomic statistics from the United States. Recently, the U.S. economic surprise index has regained a close correlation with debt market rates. Therefore, disappointing data from the United States is a reason to sell USD/JPY, and vice versa.

Dynamics of the economic surprise index and U.S. debt rates

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As for the Bank of Japan meeting, Bloomberg experts do not expect anything interesting from it. Only 3 out of 47 economists predict adjustments to the BoJ's monetary policy, including changes in yield curve control. The majority believe that the Board of Governors' meeting will be uneventful and will not bring any significant news for USD/JPY.

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Indeed, Ueda and his colleagues have no special reasons to change the monetary policy. Inflation has not stabilized at the levels they desire. Average wage growth is still far from the Central Bank's target. The bond market has calmed down and has no intention of testing the boundaries of the targeted BoJ yield range. It is possible to continue sitting on the sidelines.

Technically, on the daily chart, USD/JPY is in consolidation within a triangle. Breaking above its upper boundary near 139.9, as well as breaching resistance levels at 140.2 and 140.4, would provide a basis for purchases. Selling the pair makes sense from the level of 138.7.

Marek Petkovich,
Analytical expert of InstaForex
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