Japanese yen climbs ahead of BoJ meeting

The yen has posted sharp gains for a second straight day. In the North American session, USD/JPY is trading at 132.09, down 1.27% on the day.

Federal Reserve hikes by 0.75%

Just a few days ago, the Federal Reserve was expected to raise rates by 0.50%. Hawkish winds changed that in a hurry, and suddenly the markets had priced in a massive 0.75% hike. The Fed delivered a 0.75% salvo, the first since 1994, bringing rates to a target range of 1.50-1.75%. The Fed downgraded its US growth forecasts for 2022 and 2023, but insisted that there would be no recession. Some analysts would beg to disagree, but the financial markets were relieved, as Fed Chair Powell said he didn’t expect 0.75% rate hikes to become common.

The Bank of Japan’s policy meetings usually don’t garner much interest, with the BoJ robotically maintaining its ultra-accommodative policy. Tomorrow’s meeting, however, is being closely watched in what has been a week of intense drama from the central banks. The Federal Reserve delivered a massive 0.75% rate hike, followed by a Swiss shocker, with the Swiss National Bank raising rates by 0.50%. A move by the BoJ would cap what has been a most interesting week.

The BoJ is under strong pressure from the markets to remove its cap on 10-year JGBs at 0.25%. If the central bank acquiesces, it would be a significant move, because the BoJ has pulled out all the stops to keep the yield at this level and has intervened aggressively to defend its yield curve. A retreat in policy would be unexpected and could send the yen sharply higher. If the BoJ balks, USD/JPY could resume its rally after the correction we’ve seen over the past two days.

The yen has lost around 15% of its value this year and USD/JPY pushed above the 135 line on Monday. The BoJ and Ministry of Finance have been jawboning over the exchange rate, but the markets haven’t paid much attention to Japanese officials commenting that they are concerned about the rapid depreciation of the yen.

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USD/JPY Technical

• USD/JPY is testing resistance at 133.68. Above, there is resistance at 1.3638
• There is support at 132.26 and 131.24

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