Markets eagerly await BoJ move. Forecast as of 27.05.2024

2024.05.27 2024.05.27 Markets eagerly await BoJ move. Forecast as of 27.05.2024

Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/

If you constantly wait for new evidence, you may miss the moment for decisive action. The Bank of Japan\'s decisions are made by people, and their reluctance to take action hinders the yen. Let\'s talk about this and make a trading plan for USDJPY.

Weekly fundamental forecast for Japanese yen

The BoJ\'s dithering is slowly killing the Japanese yen. The regulator needs evidence that inflation is anchored near 2%, which seems odd at first glance. Consumer prices have been above that mark for 25 consecutive months, and Tokyo still cannot believe its good fortune, but dig a little deeper, and it all makes sense: the central bank of a country where CPI grew by an average of 0.1% in the first two decades of the 21st century wants to make sure that deflationary thinking is over.

The greater the evidence base, the greater the doubts. In this regard, the slowdown in consumer prices from 2.6% to 2.2% and core inflation from 2.9% to 2.4% in April seem to force the BOJ to move at a snail\'s pace in normalizing monetary policy. SMBC Nikko Securities believes that such CPI data will rule out an overnight rate hike in April or May and make such a move doubtful in June or July.\xa0However,\xa0not everyone shares\xa0this statement.

Japan\'s inflation rate

Source: Bloomberg.

Nomura Securities notes that April is the start of the fiscal year. As early as May, the downward trend in CPI may reverse as companies begin to implement union-negotiated wage increases of more than 5%. Capital Economics predicts that the next step in the BoJ\'s monetary policy normalization will come in July, as the weakening yen hampers the authorities\' ambitious plan for real wage growth to boost the economy.

Why is a BoJ rate hike so crucial for the USDJPY? Despite the first move in March, the gap with the US, where the federal funds rate is at 5.5%, is still huge, allowing carry traders to continue using the yen as a funding currency by buying US dollar assets.

BoJ and Fed interest rates

Source: Bloomberg.

The situation might have been different if the BoJ had tightened monetary policy at every Governing Council meeting. However, the regulator prefers caution to decisiveness. It\'s like boiling a frog alive under slow fire.

The Japanese government is acutely aware of the potential consequences. Vice Minister of Finance for International Affairs Masato Kanda has raised the possibility of currency interventions. He remains undeterred by Janet Yellen\'s caution that Forex intervention should be a rare event. According to Kanda, Tokyo will not be swayed by Washington\'s opinion, as Japan maintains close ties with other countries, including the US.

Weekly\xa0USDJPY\xa0trading plan

Thus, the confrontation between hedge funds and asset managers and between the Bank of Japan and the government continues. The risk of another intervention in the Forex market is growing by the day, so traders should be prepared for a sharp drop in the USDJPY if it fails to break above 157.15 and 157.9 or falls below 156.3.

Price chart of USDJPY in real time mode