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Trends & Analysis
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Philips shares gain on Q4 results, job cuts
News
American Express shares rise despite earnings miss
News
Mastercard’s shares decline despite upbeat results
News
Tesla’s stock surges after upbeat Q4 print
News
Is there a golden opportunity with Shopify?
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Investors unimpressed by Microsoft’s earnings beat

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Asset Watch

Will the BOJ’s bullish bump prove lasting for the yen?

 

Thursday, December 22, 2022

The Bank of Japan (BOJ) shocked the financial markets on Dec. 19 when it increased its upper 10-year interest rate band from 0.25% to 0.50%. The central bank uses yield curve control (YCC) to keep Japanese interest rates within a specific range. Increasing the band is highly hawkish because the policy shift encourages higher interest rates.
The BOJ described the change as a means to “improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions.”
So, while the USD/JPY sold off on the news, could a short-term reversal be on the horizon?

The policy shift is bullish for the yen because a wider interest rate band could result in fewer QE purchases by the BOJ. As a result, a slower-than-expected increase in the money supply supports a stronger yen and a weaker USD/JPY.

On the other hand, a similar technical development unfolded in November. When the U.S. Consumer Price Index (CPI) came in below expectations, the USD/JPY plunged by nearly 4%. However, the momentum soon shifted, and the USD/JPY recorded a short-term rally.

The large red candle on the right side of the chart shows how the USD/JPY plunged by nearly 4% on Dec. 20. With short covering (of the yen) often the primary driver of abnormal market moves, the setup could produce another relief rally for the currency pair.

Should you position for a reversal, or is the trend your friend?


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