Japanese Yen Plunged Following Speculation of BOJ Going Double Negative

Witawat (Ed) Wijaranakula, Ph.D.
Tue Apr 26, 2016

The USD/JPY exchange rate surged 2.11% on Friday to close at 111.77 yen per dollar, after a Bloomberg report said that the Bank of Japan (BOJ) may consider, at their board meeting on April 27-28, to cut the interest on excess reserves (IOER) deeper and offer negative rates to its lending program for financial institutions. That means the BOJ will be paying commercial banks to accept funding in an effort to boost lending and stimulate the economy.

In February, the BOJ introduced quantitative and qualitative monetary easing (QQE) with a negative 0.1% IOER of financial institutions placed at the bank. The BOJ also said it left the buying program of government bonds and exchange traded funds (ETFs) unchanged. Under the current QQE program introduced in April 2013, the BOJ buys 80 trillion yen per year in government bonds and 3.3 trillion yen of ETFs.

The Japanese yen has been surging since the March FOMC policy meeting, when the Fed decided to leave the key interest rate unchanged at between 0.25% and 0.5%, and to make only two rate increases by the end of the year, half the number that was forecasted at its December meeting. The Fed also trimmed its U.S. economic growth outlook for the year to 2.2%, from the previous forecast of 2.4% growth, and its forecast for inflation to 1.2% from 1.6%. 

FX traders were speculating that the BOJ would push rates even deeper into negative territory and the yen carry trade would unwind, as global outlook appeared to worsen. The Japanese yen bounced off the 107 yen per dollar level on April 12, after Japan Finance Minister Taro Aso warned that rapid moves in the currency were undesirable and that Japan would take the needed steps if one-sided and speculative moves were observed, according to CNBC. U.S. Treasury Secretary Jack Lew told Mr. Aso, at the G20 meeting in Japan on April 16, to stick with their G20 exchange rate commitments and not devalue the yen. 

There is not much Mr. Lew can do to strengthen the U.S. dollar as long as U.S. economic data is still a mixed bag. Retail sales remain lackluster despite a strengthening labor market. The Commerce Department said in mid-April that retail sales declined 0.3% in March, missing the forecast by economists polled by Reuters of a 0.1% increase. Core retail sales, excluding automobiles, gasoline, building materials and food services, were up just 0.1%, compared to the forecast of a 0.3% rise. 

Separately, the Commerce Department said on Tuesday that orders for durable goods, items built to last three years or more, slumped in March as it increased just 0.8%, compared to the Reuters economists’ forecast of a 1.8% gain. Non-defense capital goods orders, excluding aircraft, also missed expectations of a 0.8% increase.

From our technical viewpoint, the USD/JPY bounced off the lower trendline support of a descending wedge chart pattern and is now bumping into 111.58 yen per dollar, or the 50% Fibonacci retracement level. Traders might want to take the currency pair up to test the 114 yen per dollar level. At this point, a “no rate hike” decision at the FOMC meeting on April 27 may already be priced in. Many traders probably want to stay on the sidelines and wait to see what the BOJ's next move will be on April 28. 

According to Bloomberg, Goldman Sachs is unconvinced that yen strength will be sustained, as its chief currency strategist Robin Brooks wrote in a note to clients in February that the bank sees the yen weakening to 120 yen per dollar “in the near term” and 130 yen per dollar by year-end. The median of more than 50 estimates compiled by Bloomberg had called for the yen to slump to 120 yen per dollar by the end of March, and to 123 yen per dollar by year-end. Obviously, Goldman and the others made a bad call about 120 yen per dollar.


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