USDJPY Range Bound After BOJ – Will There Be A Fed-Inspired Breakout?
The Japanese Yen regained ground in the early European session after having promptly plunged following the outcome of the Bank of Japan’s two-day meeting on Wednesday. The BOJ left its interest rate unchanged but shifted the focus from monetary policy towards “yield curve control”, thereby committing to reaching the elusive inflation target of 2% as soon as possible.
At the policy review, the Japanese central bank refrained from pushing its benchmark rate further into negative territory, maintaining the rate it applies to the excess reserves held by financial institutions at the central bank. The BOJ stated that it would abandon its base money target and control bond yields across different maturities instead. Under this program, the bank will buy long-term government bonds to keep 10-year bond yields at current levels of around zero percent.
The target for the average maturity of its government bond holdings will be replaced by new tools including buying Japanese government bonds with yields designated by the BOJ and fixed-rate funds-supplying operations for a period of up to 10 years. Meanwhile, the target for expanding the monetary base through asset purchases containing JGBs, corporate paper and corporate bonds was maintained.
Additionally, the Bank will purchase exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITs) at an annual pace of about 6 trillion yen and about 90 billion yen, respectively.
Under the new framework called “Quantitative and Qualitative Easing (QQE) with Yield Curve Control”, the BOJ pledged to “continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds the price stability target of 2 percent and stays above the target in a stable manner.”
According to market sources, the new framework is supposed to be more effective than the old one, and that will enhance the sustainability of the monetary policy as well as encourage the financial sector including banks and insurance companies.
Markets vacillated slightly after the decision by the Bank of Japan as the real force that will define market direction is yet to be unleashed. The FOMC meeting that concludes later today will be the big force that is expected to move the markets significantly. The markets are estimating near zero chance for a rate hike today. However, the possibility of an interest rate increase by the end of this year is still under consideration.
Intense scrutiny will be placed on the Fed forecasts for economic growth, unemployment, inflation and the expected path of interest rates in the future. Also closely scrutinized shall be the comments from Fed Chair Janet Yellen in the press conference, that comes the heels of the rate announcement.
Fig: USDJPY H4 Technical chart
The Japanese Yen has generally been on a rise against the U.S dollar. For the last two weeks, the pair has been trading in a range from 101.200 to 102.740 amidst the cautiousness of investors. The sharp and volatile moves during the Asian session was the greatest amount of volatility seen since September 06. However, despite all the volatility the market failed to register a breakout through the recent range on either side. The Yen is paring all of its earlier losses currently and USDJPY is nearing a test of the 101.200 level. However, the support is expected to hold and USDJPY is expected to rebound from the support at 101.200
Buy Digital Call option from 101.200 to 102.000 valid until 19:00 GMT September 21,