The Japanese yen strengthened despite a dovish Bank of Japan communication, so what’s next for the Japanese yen?
The currency market is full of anomalies lately, which should perhaps not be surprising considering the tremendous monetary and fiscal stimulus seen globally in response to the COVID-19 pandemic. For currency traders, nothing is what it seems anymore as currencies have often moved in contrary directions.
One example is the Japanese yen’s rally in response to the Bank of Japan’s adjusting of the Qualitative and Quantitative Easing (QQE) and Yield Curve Control (YCC) programs.
The Japanese Yen and the YCC Adjustment
The Bank of Japan introduced its YCC measures in 2016 with an emphasis on the 10-year yield (which is the benchmark for most central banks in the developed world).
To the surprise of many, the Bank of Japan announced at the end of last year that it would raise the yield target on the 10-year yield to +/-25 basis points. This increase in the bands is significant because it was previously 10 basis points.
Even more surprising was the move in the Japanese yen pairs. Instead of appreciating against its peers, as suggested by the BOJ’s willingness to let yields rise, the yen declined significantly against the US dollar. The USD/JPY reached 110 in a sharp, bullish trend from below 103, leaving many wondering if the Bank of Japan has something else up its sleeves.
The bank also suggested that it will fine-tune its ETF purchases, intervening only if needed. This is another slightly hawkish development that was ignored by the market.
It’s not the first time a market has reacted differently than it should. For instance; when the actual exceeds the forecasts on economic releases — which should be bullish for the currency — we often see a contrary market movement.
One explanation would be that the market takes time to see the changes from a fundamental perspective. If this is the case, the Japanese yen pairs are due a cruel awakening, and the pivotal 100 level is calling if USD/JPY is not able to regain and hold the 110 level.