- The BOJ’s confusing decision to partially relax its yield curve control program has potentially pushed formal rate hikes out further.
- Yen weakness has resumed in earnest, taking USD/JPY back above 143.00 as we go to press.
- Depending on tomorrow’s US CPI report, a bullish continuation toward the early July highs near 145.00 could be in play.
USD/JPY Fundamental Analysis
As any USD/JPY trader already knows, the BOJ recently did something rather confusing: It opted to widen the band on its yield curve control program, allowing the yield on the country’s 10-year sovereign bond to rise as high as 1.00%, though the preferred target is still 0.5%. In practice, this served as a small interest rate hike, and the yield on 10-year JGBs has edged up to roughly 0.55% today from 0.45% before the announcement.
For traders who had been expecting the BOJ to join the rest of the developed world in raising interest rates to combat elevated inflation, this “move” was rather underwhelming, and it has sparked another wave of selling in Japan’s currency. With the 10-year yield spread between the US and Japan still holding at roughly 3.4%, near where it was pre-BOJ, and the prospect of any official BOJ rate hike seemingly pushed back, USD/JPY has resumed its year-to-date rally and may soon hit fresh 2023 highs, especially if tomorrow’s US CPI report comes in hotter than expected (0.2% m/m, 3.3% y/y eyed).
Japanese Yen Technical Analysis – USD/JPY Daily Chart
Source: TradingView, StoneX
As the chart above shows, USD/JPY is trading back above 143.00, within striking distance of the early July highs around 145.00. If the pair can clear last week’s high in the 143.80 area, a retest of that key area, or even the 78.6% Fibonacci retracement of the October 2022 – January 2023 pullback at 146.60 becomes more likely.
For now, the path of least resistance in USD/JPY remains to the topside, with tomorrow morning’s US CPI as the next major catalyst that could change (or accelerate) the short-term outlook.
-- Written by Matt Weller, Global Head of Research
Follow Matt on Twitter: @MWellerFX