11.09.2019 03:46 PM
USD/JPY: Kuroda scared traders: yen loses ground

The dollar/yen pair is holding at 1.5-month highs amid weakening anti-risk sentiment in the market, as well as in anticipation of the September meeting of the Bank of Japan, at which the regulator may announce a reduction in interest rates deep into negative territory. Although the meeting of the members of the Japanese regulator will take place only at the end of next week (September 19), the yen "in advance" plays out its possible consequences. Recent comments by Haruhiko Kuroda only added fuel to the fire: the head of the Central Bank of Japan did not rule out easing monetary policy at the next meeting while focusing on the slowdown in the global economy. Thus, the prevailing fundamental background at the moment contributes to the growth of USD/JPY at least to the middle of the 108th figure, especially if the bulls can gain a foothold above the resistance level of 107.90 (the average line of the Bollinger Bands indicator on the weekly chart).

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It is worth recalling that in July last year, the Bank of Japan expanded the range, or rather, the limits of long-term interest rates: as a result of this correction, the regulator moved not only the "ceiling", but also the lower limit of -0.2%. In other words, Kuroda had already set the stage for a possible interest rate cut further into the negative. Most experts categorically stated that the focus should be on the lower border of this corridor, and not the upper one, given the dynamics of inflation in the country. More than a year has passed since then, and as you know, the Japanese Central Bank did not take this opportunity, although Kuroda repeated at almost every meeting that the regulator was ready to act "if necessary".

Recently, however, traders have become seriously concerned that the Bank of Japan will move from words to deeds. First, despite years of monetary stimulus, Japanese inflation remains well below the two percent target. According to the latest data, core inflation in Japan (in annual terms) remained at the lowest level in the last two years. Excluding fresh food, the July consumer price index came out at 0.6% – the weakest rate of growth since July 2017.

In his last interview, which was published last week, the head of the Bank of Japan noted that 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. However, he added that the issue of rate cuts further into the negative area "remains on the agenda." Moreover, Kuroda outlined several possible scenarios. In addition to a direct rate cut, the Central Bank may lower the target for long-term rates, intensify asset purchases, while accelerating the expansion of the monetary base. Also, the head of the Central Bank did not rule out that the above options can be combined.

Although Harukiko Kuroda emphasized that the regulator will resort to this scenario only if the situation worsens, we remember January 2016, when the Japanese Central Bank unexpectedly introduced a negative rate on new deposits. Although the week before, Kuroda was convincing parliamentarians that the Central Bank "did not even seriously consider such a scenario." Given this incident, traders should not lose their vigilance: the Bank of Japan may begin to act at the September meeting, despite the seemingly unlikely scenario.

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In general, the bulls of the USD/JPY pair have a difficult time: the yen is forced to react not only to the internal fundamental background but also to the external one. As a rule, these factors have the opposite meaning for the yen, so the price dynamics follows the principle of "one step forward – two back". The complexity of the situation is because the northern momentum of the pair ends abruptly and often unexpectedly: for this, for example, it is enough that rumors about the escalation of the US-China trade conflict appear on the market. Now, there is a period of "thaw" in relations between Beijing and Washington. On the eve of the next (13th) round of negotiations to be held in early October, China abolished duties on some goods from the United States: the Chinese government decided to remove additional tariffs of 25% on 16 categories of goods from September 17. Although the list did not include important items of American exports (soybeans, pork, and corn), this "goodwill gesture" was positively perceived by the foreign exchange market: anti-risk sentiment decreased, as did the demand for the Japanese currency.

Thus, the USD/JPY pair has the potential for further growth due to optimistic sentiments about the prospects of the US-China talks, as well as due to possible actions of the Japanese regulator at the September meeting. Taking into account these factors, the pair may grow to the Kijun-Sen line on the weekly chart, which corresponds to the level of 108.40. The next resistance level is at 109.50 (the lower limit of the Kumo cloud on the same timeframe). If the 13th round of negotiations is disrupted (including at the preparatory stage), the pair will quickly return to the 106th figure, despite the "dovish intentions" of the Central Bank of Japan.

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