- The Japanese Yen trades sideways, bouncing above 160.00 against the US Dollar.
- The BoJ is holding consultation rounds with bond market participants.
- The US Dollar Index hovers around 105.00, with French election euphoria fading fast.
The Japanese Yen (JPY) is afloat and moves sideways above 160.00 against the US Dollar (USD) on Tuesday. Traders are staying out of the Japanese Yen, as the Bank of Japan (BoJ) is holding a consultation round with several bond market participants. The BoJ is exploring ways to best reduce or end its bond-buying program to close off over a decade of a very loose monetary policy regime.
Meanwhile, the US Dollar Index (DXY) – which gauges the value of the US Dollar against a basket of six foreign currencies – took a minor hit on Monday, with markets applauding the outcome of the second round of French elections. With a gridlock verdict regarding government formation, the sigh of relief in markets is fading fast as eyes shift to Capitol Hill, where US Federal Reserve (Fed) Chairman Jerome Powell will testify about the semiannual Monetary Policy Report to the US Congress in Washington. Although nothing new is expected, a chance for any dovish openings or hints toward a September interest rate cut could move markets.
Daily digest market movers: Bets across on the size
- With the meeting between the BoJ and market participants ended, comments are out from several major banks that are penciling in between 1 to 3 trillion Yen in reductions quite soon, according to Bloomberg.
- A heat wave in Japan is squeezing the energy grid to its maximum capacity. In Tokyo, regulators are monitoring the situation, industry minister Ken Saito said in a regular briefing on Tuesday, according to Bloomberg.
- The Bank of Japan survey round with bond market participants reveals a wide range of options for bond-cutting, ranging from zero over 2-3 trillion yen to a maximum of 4 million yen in buybacks.
- Japanese equities have had a field day this Tuesday, soaring nearly 1% in both the Topix and the Nikkei. European equities are struggling, while US futures are in the green.
- The CME Fedwatch Tool is broadly backing a rate cut in September despite recent comments from Fed officials. The odds now stand at 73.6% for a 25-basis-point cut. A rate pause stands at a 22.9% chance, while a 50-basis-point rate cut has a slim 3.5% possibility.
- The Overnight indexed Swap curve for Japan shows a 60.1% chance of a rate hike on July 31 and a 35.2% chance for a hike on September 20.
- The US 10-year benchmark rate trades at the lower end of this week’s range near 4.29%.
- The benchmark 10-year Japan Treasury Note (JGB) trades around 1.09%, just a touch away from a fresh high for this week.
USD/JPY Technical Analysis: 160.00 and lower
The Japanese Yen has not been able to use the momentum from late last week after a very soft retreat towards 160.00 against the US Dollar, just enough to push the Relative Strength Index (RSI) out of the overbought area. With the BoJ stepping up its consultations with bond market participants, pressure is building towards the end of July for a rate hike.
On the downside, the pivotal level near 160.32 is working as support and triggered a bounce on Monday. On the upside, 162.00 remains the level to beat before printing again a fresh multi-decade high. In case the bounce fails and starts to test the pivotal support at 160.32 again, a slide lower towards the 55-day Simple Moving Average (SMA) at 157.37 will be the first support to watch on the downside.
USD/JPY Daily Chart
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
