The Bank of Japan at today's meeting maintained the status quo, leaving all the parameters of monetary policy in the same form. This fact in itself is not remarkable, because the Japanese regulator has not taken any active action since September 2016, when it began an experiment with targeting the yield of 10-year government securities. In July this year, the Bank of Japan adjusted the volume of securities of exchange-traded index funds purchased annually. But in general, the parameters of monetary policy have remained unchanged for several years: the central bank has kept the target yield of 10-year government bonds at "about zero" and the interest rate on deposits of commercial banks at -0.1%.
Although nothing changed at the September meeting, the Japanese currency received some support, strengthening throughout the market (including in the pair with the dollar, falling back to 107th figure). The USD/JPY bears simply took advantage of the situation, turning the "passing" meeting in their favor. The market has been escalating the situation regarding the possible actions of the Japanese Central Bank for several weeks. In particular, 10 days before the meeting, Harukiko Kuroda said in an interview that the issue of reducing the rate further into the negative area is still "on the agenda".
Many journalists picked up the phrase, bringing it to the headlines. At the same time, most of them distorted the context of the voiced position. After all, in fact, the head of the Bank of Japan was not so unambiguous in his assessments – moreover, he immediately made a reservation that at the moment the situation is "not so bad" that the regulator resorted to decisive action now, especially against the background of steady growth in consumer spending and investment. But the market heard what he wanted to hear, so the yen was actively getting cheaper for several days, paired with the dollar going from the 105th to the middle of the 108th figure.
The devaluation of the yen contributed to the overall fundamental background in the foreign exchange market. Anti-risk sentiment fell markedly after Washington and Beijing set a date for high-level talks. Events in the Middle East had only a short-term impact on the dynamics of protective instruments. The oil market stabilized quite quickly (although quotes have not yet returned to their previous positions), and the Saturday incident did not receive its military continuation. Yesterday, Saudi Arabia officially accused Iran of involvement in the attack on oil fields, but the country's defense minister did not talk about any retaliatory measures. The US President also stated his unwillingness to fight with Tehran, while instructing his aides to increase sanctions pressure. In other words, the worst-case scenario has not been realized (yet), so the "Middle East" fundamental factor has ceased to support protective assets, including the yen.
To date, we see a corrective southern pullback on the USD/JPY pair, but in the medium term, the price retains its growth potential, up to the level of 108.90 (the upper line of the Bollinger Bands indicator on the daily chart). The market was surprised by the absolutely "passing" meeting, and this fact provided temporary support for the Japanese currency. But short positions in this situation look risky. First, the Bank of Japan announced that it will review economic and price changes at its next meeting, the results of which we will learn on October 31. At the October meeting, Central Bank members will conduct a quarterly review of their long-term growth and inflation forecasts. According to experts, the regulator will take additional incentive measures. This factor will exert background pressure on the yen.
In favor of the further growth of the USD/JPY pair, the events of the external fundamental background also speak. Relations between the US and China have recently warmed significantly, on the eve of the next round of talks. China exempted certain categories of US imports (including agricultural products) from additional duties, while the United States postponed the date of the increase in duties. Just yesterday, Donald Trump "boasted" to journalists that China has begun to purchase agricultural products from the United States again. At the same time, he expressed hope that the "historic trade agreement" will be concluded before November next year, that is, before the American presidential elections.
Of course, relations between Beijing and Washington are quite windy – in October, the parties may again slam the door and increase mutual sanctions pressure. But until then, the Japanese currency, like all other protective instruments, will be vulnerable. In other words, the southern momentum of USD/JPY is corrective, and upon completion of the correction, the pair can continue to grow to the first resistance level of 108.90.
