By Reem Aboul Hosn  Research and Market Analyst Officer, CFI Ltd
By Reem Aboul Hosn Research and Market Analyst Officer, CFI Ltd

Central bank’s forward guidance suggests inflation target remains a long way off

The Bank of Japan has vowed not to raise interest rates before spring 2020. A specific date gives markets better certainty during the next year, with nobody expecting a rate rise, and will unlikely make any substantial difference to the economy.

First Published: e-Forex Magazine 86 / Currency Clips / May 2019

The Bank of Japan has vowed not to raise interest rates before spring 2020. A specific date gives markets better certainty during the next year, with nobody expecting a rate rise, and will unlikely make any substantial difference to the economy.

Economic Uncertainty, and concerns about slowing growth and the lack of progress towards its 2% inflation objective, the BoJ trimmed its growth forecasts for 2019 and 2020 and forecast inflation of just 1.6% to March 2022.

In an effort to improve the functioning of markets, BoJ also relaxed collateral conditions and fees on lending facilities, accepting BBB-rated corporate debt as collateral, and made it easier for market players to borrow its stock of government debt and exchange traded equity funds.

The Yen Hangs on Trade Exports
There was further evidence of a slowdown in global trade as Japan’s exports contracted for a third consecutive month in February. Exports fell 1.2% y/y and the headline was worse than economists had expected, with estimates looking for a 0.9% contraction. Imports fell 6.7% y/y and as a result the trade balance recorded a surplus of Yen 335 billion, the first surplus in five months.

We should note that the 2019 markdown in yields did not pull the dollar lower! This means investors sought rewards mainly from carry trades. However, the yield inversion is likely to affect market sentiment, with USD/JPY looking at moving lower while the yen’s safe-haven status comes back into light. Unless, of course, capital outflows from Japan weigh down the Japanese currency.

Forecast: Asia Falls to Tariff Fears

Growing fears about the impact of a worsening U.S.-China trade conflict on global growth lifted the safe-haven Japanese yen to a six-week high against the dollar in May, 2019.

With monetary policy decisions by the Fed and the BOJ taking a backseat at this time, the main focus for investors will continue to be safe-haven protection. If U.S. stock markets continue to slide then look for the USD/JPY to decline further.If U.S.-China trade relations resume on a positive path then stocks are likely to recover. This should trigger a rally in the Dollar/Yen.

Technical Analysis

Traders’ focus is on whether the dollar/yen will strengthen past the level 109.70 yen per dollar. The yen would break through that level if Trump followed through on his threat to increase tariffs on $200 billion worth of Chinese products in May, and vented impatience over negotiations with China.

The safe-haven Japanese Yen remained well bid on and momentarily dragged the USD/JPY pair below the key 110.00 psychological mark.

The future bullishness of the USD/JPY depends on the pair to hold above 110.00 resistance. Any move below it will support the bearish correction that pushed the pair to 109.90 support.