The choice of the Governor of the Bank of Japan and the American inflation numbers will be the most influential factors on the performance of the USD/JPY currency pair this week. During last week’s trades we saw a strong fluctuation in the performance of the USD/JPY currency pair amid conflicting reports from Japan about who will take over the presidency of the Central Bank of Japan. The performance revolved between the resistance level 132.90 and the support level 129.80 and closed the week’s trades around the 131.37 level.
The Japanese yen had rallied ahead of last weekend amid speculation over who might lead the Bank of Japan (BoJ) from April but regardless of which candidate is ultimately chosen or not, there are banana skins strewn along the way, which could limit the end so far the currency is able to rise.
Japanese exchange rates were higher against G10 currencies on Friday while the yen also rose against all its other G20 counterparts except the Russian ruble after a NIKKEI report suggesting former Bank of Japan board member Kazuo Ueda could be the bank’s next governor. Commenting on that, Adam Cole, senior forex analyst at RBC Capital Markets, says: “We will judge the initial speech in the US dollar / Japanese yen as reflecting that the appointment is not at Amamiya, and not specifically at Ueda.” “During his time on the Bank of Japan’s board in the early 2000s, Ueda was economical and realistic, not easily labeled as hard-line or pessimistic,” the analyst wrote in a research note on Friday after citing RBC.
Previously, speculation had been that Tokyo’s choice would be Masayoshi Amiya, who was widely seen by financial market analysts as the least likely to pursue monetary policy normalization by the Bank of Japan in the near future. NIKKEI reported on Friday that Amamiya had been approached about taking the role, but that she had “absolutely refused”.
Earlier reports that Amamiya was running for the top job were followed by losses in Japanese exchange rates. In general, financial markets have used, perhaps mistakenly, what is known about the candidates’ long-standing policy positions to infer how they are likely to approach the task of normalizing interest rates and bond market policies at the Bank of Japan if and when it eventually becomes necessary.
Big risks abound for central banks as they extricate themselves and their economies from the low interest rate quagmire that has prevailed for most of the time since the 2008 financial crisis, and although this is particularly true for Japan, given the longer low interest rate policies there.
Japan’s fight against low inflation has involved using persistently low borrowing costs, and has continued for more than three decades, leaving tidal waves of annual savings and other capital in the world’s third-largest economy looking for better returns elsewhere. A portion of the capital may be withdrawn from the authorized original capital and repatriated in the event of any policy normalization at the Bank of Japan, which poses a significant upside risk to the yen, which is why financial markets are quick to raise the price of the Japanese yen in response to speculation.
The extent to which the Japanese economy is accustomed to, if not built upon, low interest rates is one important reason why policy can only be normalized slowly and with a high degree of caution. This in turn is just one of the many banana skins along the way in front of the Japanese yen.
Technical analysis of the US dollar / Japanese yen pair:
- In the near term and according to the performance on the hourly chart, it seems that the USD / JPY currency pair is trading within the formation of an ascending channel.
- This indicates a slight upward trend in the short term in market sentiment.
- Therefore, the bulls will look to extend the current gains towards 132.123 or higher to the resistance 132.875.
- On the other hand, the bearish speculators will look to pounce on a pullback at around 130.663 or lower at the 129.820 support.
In the long term and according to the performance on the daily chart, it seems that the USD / JPY currency pair has recently completed an upward breakout from the descending channel formation. This indicates a major change in market sentiment from bearish to bullish. Therefore, the bulls will target the long-term profits at around 133.578 or higher at the 136.500 resistance. On the other hand, the bearish speculators will look to pounce on profits at around 128.706 or lower at the 125.540 support.
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