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The recent surge in the strength of the yen has led to a noteworthy decline in the USD/JPY pair, breaching the crucial 146.00-level and breaking below the support established by the low on December 4th, recorded at 146.23. This market shift can be attributed to a heightened sense of speculation among market participants, fuelled by the anticipation that the Bank of Japan (BoJ) might consider tightening its monetary policy as early as the upcoming meeting on December 19th.
USDJPY 15 minutes
Source: Charts courtesy Meta quotes ACY Securities
Overnight reports emerged, revealing that BoJ Governor Ueda engaged in discussions with Prime Minister Kishida regarding monetary policy in preparation for the December meeting. According to sources such as Bloomberg, Governor Ueda delved into conversations with the prime minister, addressing the state of the economy and emphasizing the close monitoring of wages and their potential impact on prices. It is worth noting that Governor Ueda clarified that such meetings between a BoJ Governor and the prime minister are routine occurrences, taking place several times a year.
JPY Strength (on light blue)
Source: Prime Market Terminal (Currency Strength)
In addition to these interactions, Governor Ueda took the opportunity to speak before parliament, delivering a semi-annual report on currency and monetary control. During this address, he reiterated the commitment to achieving the inflation goal while maintaining an accommodative policy to support wage growth. Despite acknowledging the existence of various options for the policy rate in the event of a raise, he refrained from specifying a p articular new rate level.
While discussions hinted at the possibility of an exit from the negative rate policy, Governor Ueda's comments did not suggest an imminent move in that direction this month. He emphasized the importance of effective communication before implementing any changes, indicating that it might be premature for an exit simulation. Nevertheless, the prevailing unease surrounding the potential departure of the BoJ from a negative rate policy has evidently impacted the Japanese Government Bond (JGB) market overnight. The 10-year JGB yield experienced a notable increase of around 10 basis points, marking the most significant surge in a year. Additionally, the latest 30-year JGB auction saw the lowest bid-cover ratio since 2015.
These recent market dynamics align with my existing short USD/JPY trade idea. I had previously anticipated the BoJ's potential exit from the negative rate policy in January, with the goal of reducing policy divergence with other major central banks. The recent downward trajectory of USD/JPY is primarily attributed to decreasing US yields, driven by market participants adjusting their expectations for earlier and deeper Fed rate cuts in the upcoming year. The release of the weaker-than-expected ADP survey for November, indicating a modest increase of only 103k in private employment, has further fuelled these expectations. However, it's important to note that doubts persist regarding the accuracy of the ADP survey as a reliable leading indicator for broader payroll figures.
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