JPY Sees Heavy Selling

Another week comes to a close in financial markets, as we round the first third of the year. Once again, it’s been a very interesting week with plenty of big moves to note. In the FX space specifically, it seems that the main theme capturing attention this week has been the continued decline in the Japanese Yen. We’ve seen steep moves across the board but it’s the almost 4% rally off the weekly lows in USDJPY which seems to be the main pair dominating end of week chats. So, let’s take a look at what caused the move and, as ever, if you caught it? Well done! If not? There’s always next week.

What Caused the Move?

BOJ Reaffirms Easing Stance

The main driver behind the further decline in the Japanese Yen this week was the April Bank of Japan monetary policy meeting. The BOJ took the opportunity to reaffirm its commitment to staunchly maintaining an easing presence in the market. The bank noted that it will continue with its strategy of daily purchases of Japanese government bonds in a bid to keep bond yields at or near zero.

Central Bank Monetary Policy Divergence

With most of the rest of the G10 central banks having already embarked on a path of policy normalisation, or signalled their intent to, this latest message from the BOJ has created clear monetary policy divergence. The BOJ warned that the domestic economy is currently too fragile to withstand any such tightening from the BOJ.

Increased Fed Hawkishness

At the same time that the BOJ is reaffirming its commitment to easing, Fed expectations are turning ever more hawkish. The market is now widely pricing in a .5% hike next week from the Fed, in line with a raft of hawkish commentary from Fed members and the very hawkish details revealed in the March FOMC minutes. The minutes revealed that the Fed discussed hiking by .5% in March but opted to wait. However, over half of the Fed’s members are now in favour of using larger .5% hikes, with May likely to mark the first of a series of larger hikes.

Technical Views

USDJPY

For now, USDJPY continues to move higher within a steep, narrow channel. Price has recently broken through the 125.65 and 128.50 levels and, while above the latter level, the focus remains on a continuation towards the 134.39 level next. However, worth noting that we are seeing bearish divergence in momentum studies, so be aware of reversal risks near term.