USD/JPY – Yen Jumps as BOJ Makes Changes to Easing Policy

USD/JPY has posted sharp losses on Friday, as the yen has gained about 100 points on the day. In the European session, the pair is trading at 121.50. In economic news, the Bank of Japan did not expand its monetary easing program, but did announce new ETF purchases. In the US, there is just one minor event on the schedule. The markets will also be listening closely to remarks from FOMC member Jeffrey Lacker, the first Federal Reserve Bank President to speak publicly after the historic rate hike of 0.25 percent.

The Bank of Japan has been under strong pressure to expand its easing program, given the lackluster performance of the Japanese economy, which has been hit hard by the twin blows of weak global demand for Japanese goods and sluggish domestic economic activity. Despite the sluggish economy, the BOJ has been very reluctant to further expand easing, and did not make any changes to monetary base easing of JPY 80 trillion annually. However, the BOJ did make some changes to monetary policy, announcing that it would purchase 300 billion yen of ETF’s annually, as well as extend the average duration of Japanese government bond purchases to 7-12 years, up from 7-10 years, commencing in 2016. The BOJ is trying to keep a low profile over the move, which BOJ Governor Haruhiko Kuroda described as “tinkering”.

On Wednesday, the Federal Reserve raised interest rates by 0.25%, the first upward move since June 2006. The Fed dropped a broad hint in its October policy meeting about a rate hike before the end of 2015, and predictably, this led to tremendous speculation in the markets. To the credit of Fed chief Janet Yellen and her colleagues, the Fed put into place a carefully-crafted strategy, sending a steady of stream of signals that it was intending to tighten monetary policy, if economic conditions remained positive. This gave the markets ample time to price in a rate hike, and the 80-point gains by USD/JPY on Wednesday were certainly not excessive, given the momentous event of the first rate hike by the Federal Reserve in almost 10 years.

Although the small rate hike has not shaken up the currency markets and is expected to have limited economic impact, the psychological angle of the rate move cannot be overestimated, as the Fed has given the US economy a critical vote of confidence, and has indicated that additional rates are likely over the course of 2016. The Fed’s strategy contrasts sharply with the bungled approach of Mario Draghi at the ECB, who hinted that the ECB would take significant easing steps at its December meeting, but failed to deliver as the ECB did little more than extend the current QE program for another six months. This led to complete turmoil in the markets, resulting in a sharp ascent by the euro.

There was good news from the US labor market on Thursday, as Unemployment Claims fell to 271 thousand last week, down from 282 thousand. The US labor market has improved nicely, as the economy is close to full employment, with jobless claims and the unemployment rate at low levels. Impressive employment numbers was a major reason that the Federal Reserve felt comfortable pressing the rate trigger at this week’s policy meeting. Still, weak spots remain in the US economy, among them the manufacturing sector, which continues to struggle. This was underscored by the Philly Fed Manufacturing Index, a key manufacturing indicator. The index came in at -5.9 points, its third decline in four months.

Friday (Dec. 18)

• 3:50 BOJ Monetary Policy Statement
• 6:30 BOJ Press Conference
• 14:45 US Flash Services PMI. Estimate 55.9 points
• 18:00 US FOMC Member Jeffrey Lacker Speaks

*Key releases are highlighted in bold

*All release times are GMT

USD/JPY for Friday, December 18, 2015

USD/JPY December 18 at 11:10 GMT

USD/JPY 121.50 H: 123.55 L: 121.04

USD/JPY Technical

• USD/JPY has posted losses in the Asian and European sessions
• 121.50 was tested earlier in support and is under strong pressure
• 122.40 is the next resistance line
• Current range: 121.50 to 122.40

Further levels in both directions:

• Below: 121.50, 120.40 and 118.53
• Above: 122.40, 123.74, 125.63 and 126.84

OANDA’s Open Positions Ratio

USD/JPY ratio is unchanged on Friday, despite sharp gains by the Japanese yen. Long positions continue to command a solid majority (64%), which is indicative of strong trader bias towards the pair reversing directions and moving higher.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.