Last week, the Dollar/Yen closed lower as investors continued to focus on the direction of U.S. Treasury yields. Investors have been reacting to the interest rate differential between U.S. Government bonds and Japanese Government bonds, which has been tightening for the last 17 sessions, making the U.S. Dollar a less-attractive investment.
The USD/JPY settled the week at 107.877, down 0.916 or -0.84%.
This week, Dollar/Yen traders will have the opportunity to react to monetary policy decisions by the Bank of Japan (BOJ) on Tuesday and the U.S. Federal Reserve on Wednesday.
Bank of Japan
The BOJ is set to kick-off their policy meeting across April 26 – 27 for the third time this year, with monetary policy expected to remain unchanged as the country battles rising COVID-19 cases.
A consensus of analysts widely expect the BOJ to maintain its target of -0.1% for short-term rates and 0% for the 10-year bond yield, under its policy of negative interest rate policy (NIRP) coupled with yield curve control (YCC). This was also reiterated by BOJ governor Haruhiko Kuroda recently with his comment to ‘continue monetary easing for a long period of time via YCC’, suggesting that the policy stance will well remain through 2021.
The outlook report to be released after the upcoming meeting will be one to watch, with growth forecasts in focus. Refinitiv estimates point to 1.2% GDP growth in Q2 2021, with full-year growth at 3.9%.
U.S. Federal Reserve
The U.S. Federal Reserve, which meets on Tuesday and Wednesday, is expected to defend its policy of letting inflation run hot, while assuring markets it sees the pick-up in prices as only temporary. Chairman Jerome Powell will host a press conference Wednesday afternoon to discuss the Federal Open Market Committee’s decision.
Powell is likely to face questions over whether an improving labor market and rising coronavirus vaccinations warrant a withdrawal of monetary easing, but most analysts expect him to say such talk is premature, which would put downward pressure on Treasury yields and the dollar.
Over the weekend, Reuters reported that there is fresh speculation that Powell will shun talk of tapering bond purchases. This topic had been brought up by traders late last week.
Traders will be watching the BOJ and Fed for any surprises that could move the interest rate differential and consequently the USD/JPY. There are some that are expecting a non-event, which likely means the downtrend will continue until the sellers decide they’ve had enough.
The Fed is largely expected to maintain its usual dovish position while the U.S. 10-year yield continues its descent since April, showing little reaction to a recent series of robust economic data over the past few weeks.
With the BOJ’s policy framework on keeping monetary easing sustainable, improvement in inflation figures towards the 2% target will be closely watched over the coming months.
Additionally, longer-term, the vaccination pace will remain a key catalyst to economic recovery. With an estimated 0.6% of the population being fully vaccinated compared to 28% in the U.S., Japan will have to convince the markets that it will be able to keep the current COVID-19 situation under control until then.