USD/JPY – Yen Slides as BoJ Shocks With Negative Rates

The Japanese yen is down sharply on Friday, dropping close to 200 points against the US dollar. In the European session, the pair is trading slightly below the 121 line. On the release front, the BOJ surprised the markets by lowering interest rates into negative territory. Japanese releases disappointed, led by Household Spending and Tokyo CPI which missed their estimates.

The Bank of Japan is not known for dramatic moves, but the Japanese central bank shocked the markets by adopting negative interest rates. BoJ Governor Haruhiko Kuroda has warned in recent weeks that the BoJ would step in with further monetary easing if necessary, and those market players who assumed that Kuroda was posturing were in for a rude surprise on Thursday. The BoJ has been largely unsuccessful at propping up inflation levels, and this has hampered the weak economy. Will this monetary move help matters? The ECB has implemented negative rates for some time, but inflation levels have not responded. What did react in a hurry to the central bank’s dramatic move was the yen, as USD/JPY has surged to its highest levels since late December. Meanwhile, consumer and inflation numbers are mired at low levels. Household Spending posted a dismal reading of -4.4%, a third consecutive decline. Tokyo Core CPI came in at -0.1%, short of the forecast of +0.1%. This index, the primary Japanese inflation indicator, has not shown a gain above 0.1% since April 2015, underscoring the dismal inflation picture.

As widely expected, the Federal Reserve stayed the course and maintained the benchmark rate at 0.25%. The Fed statement was dovish in tone, as policymakers noted that there are soft spots in the economy, such as consumer spending and exports. The inflation picture remains problematic, with the Fed saying that inflation levels will remain low, and may not reach the target of 2.0% until 2018. At the same time, the Fed emphasized that the US labor market remains strong. Will we see another rate hike in March? The Fed has not provided any strong hints on its next move, so the markets will have to show some patience. Given the Fed’s continuing concerns about a lack of inflation, it’s hard to foresee another rate hike in March absent a strong improvement in key US indicators. On the release front, US durable goods reports were dismal in December. Durable Goods dropped 1.2%, while Core Durables plunged 5.1%, well off the estimate of a 0.6% decline. These poor numbers underscore ongoing weakness in the US manufacturing sector, which has not improved despite positive economic conditions. There was more bad news on the housing front, as Pending Home Sales posted a negligible gain of 0.1%, well off the estimate of 1.0%.

USD/JPY Fundamentals

Thursday (Jan. 28)

• 22:38 BOJ Monetary Policy Statement

Friday (Jan. 29)

• 00:00 BOJ Outlook Report
• 00:00 BOJ Core CPI
• 00:00 BOJ Housing Starts
• 1:30 BOJ Press Conference
• 8:30 US Advance GDP. Estimate 0.8%
• 8:30 US Advance GDP Price Index. Estimate 1.2%
• 8:30 US Employment Cost Index. Estimate 0.6%
• 8:30 US Goods Trade Balance. Estimate -60.0B
• 9:45 US Chicago PMI. Estimate 45.4 points
• 10:00 US Revised UoM Consumer Sentiment. Estimate 93.1 points
• 10:00 US Revised UoM Inflation Expectations

Upcoming Key Events

Monday (Feb. 1)

• 10:00 US ISM Manufacturing PMI

*Key releases are highlighted in bold

*All release times are EST

USD/JPY for Friday, January 29, 2016

USD/JPY January 29 at 5:20 EST

Open: 118.92 Low: 118.37 High: 121.41 Close: 120.82

USD/JPY Technical

• USD/JPY posted sharp gains in the Asian session, breaking through two resistance lines. The pair is steady in European trade.
• There is resistance at 121.50
• 120.40 has switched to a support line following strong gains by the pair. It is a weak line.
• Current range: 120.40 to 121.50

Further levels in both directions:

• Below: 120.40, 119.58, 118.53 and 116.88
• Above: 121.50, 122.40 and 123.67

OANDA’s Open Positions Ratio

USD/JPY ratio is showing little change, despite sharp gains by the pair. Long positions continue to command a solid majority (61%), which is indicative of strong trader bias towards the pair continuing to move 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.