BOJ Market Chatter

Expectations of forthcoming tightening from the Bank of Japan have ratcheted higher this week. Reuters is running an article citing BOJ sources’ suggesting that the bank could go for a larger-than-expected quantitative tightening at the July meeting, along with a surprise rate hike. With JPY having fallen sharply since the last BOJ meeting, many traders have been toying with the idea of some surprise action from the BOJ to help bolster the Yen. Despite this chatter, however, USDJPY has rallied almost 5% from the June lows, creating an even greater need for action. The big issue for the BOJ is that a weaker JPY helps drive up import inflation, ultimately offsetting the impact of BOJ tightening.

Shifting Expectations & JPY Impact

At the last meeting, the BOJ held policy level across the board, despite some expectation that a shift in bond purchases could be announced. Instead, the BOJ outlined that a change in course on bonds was under discussion and would be announced in July. Given that expectations for a double announcement are starting to rise, the key thing for the BOJ will be how it makes an effective enough move. To this end, a rate hike alongside a higher level of QT looks likely. However, we might also hear the BOJ taking a more firmly hawkish tone, paving the way for a quicker pace of tightening than previously expected. If seen, this should help drive some reversal action in USDJPY, particularly if we see Fed easing expectations growing this month.

Technical Views

USDJPY

The breakout rally in USDJPY has stalled for now though price remains atop the 160.22 level. For now, the focus is on a continuation higher, given the bull channel framing price action, with 163.58 sitting above as the bull target. To the downside, 158.28 remains key support with the bull channel lows there also.