Alert yen traders!
The Bank of Japan is preparing to release its monetary policy statement later this week, and it will be Governor Kazuo Ueda’s first appearance as head of the central bank.
Here is what you should know if you are planning to trade this first class catalyst.
Focus on the event:
Bank of Japan monetary policy statement
When will it be released:
April 28, Friday: around 3:00 AM GMT, 4:00 AM London time, 11:00 PM (April 27) New York, 12:00 PM Tokyo
Expectations:
As the new Governor Ueda has mentioned in his recent speeches, the current ultra-easy monetary policy is appropriate for the time being, given the latest round of inflation data.
However, it is also important to note that the Tokyo CPI numbers It comes ahead of the actual BoJ meeting, so any big surprises could continue to shift policy bias.
A few days ago, Ueda confirmed that the Bank of Japan’s inflation forecasts for half a year, one year, and one and a half years “It should be very strong and close to 2%before considering YCC changes.
Also, don’t forget to every three months Bank of Japan outlook report It is also lined up for Friday. These contain updated economic forecasts, which should provide some clues as to whether or not the central bank is preparing for YCC adjustments in June.
Relevant Japanese data since the latest BoJ statement:
Arguments for Tightening / Bullish Japanese Yen
The April manufacturing PMI improved from 49.2 to 49.5, reflecting a slowing pace of contraction but still below the figure of 49.9.
Core CPI for March held steady at 3.1% y/y against expectations for a decline to 3.0%.
BoJ core CPI for March came in hot at 2.9% yoy (expectations 2.6% yoy) vs. 2.7% yoy prior.
February retail sales improved from 5.0% yoy to 6.6% vs expected gain of 5.9%
Tertiary industry activity for the month of February posted another gain of 0.7% m/m versus an estimated rise of 0.4%, leading to two consecutive surprise rises.
🔴 Arguments for looser monetary policy / bearish yen
The producer price index for March fell from 8.3% y/y to 7.2% as expected, marking a third consecutive month of decline.
February average cash earnings rose 1.1% year-on-year, up from a previous gain of 0.8%. Real wages fell for the 11th consecutive month but at a slower pace.
Household spending rebounded in February by 1.6% year-on-year versus an estimated increase of 4.9%, indicating weaker consumer activity.
The Bank of Japan core CPI for February fell from 3.1% y/y to 2.7% while the Tokyo core CPI fell from 3.3% to 3.2%
Previous issues and the impact of the risk environment on the Japanese yen
March 10, 2023
Action / Results: The Bank of Japan kept monetary policy unchanged as expected, with officials voting unanimously to keep yield curve control in place.
Governor Kuroda doesn’t seem inclined to ruffle feathers, as he prepares to move into Ueda Command.
Risk Environment and Intermarket Behaviors: Tight central bank comments kept global bond yields supported for most of the week, sending risky assets like stocks and commodities lower.
January 18, 2023
Action / Results: The Bank of Japan left policy and yield curve targets unchanged but cut its GDP forecast for 2023 and left its CPI forecast unchanged.
Some expected the Bank of Japan to tighten monetary policy further while inflation was accelerating in Japan, but we saw the exact opposite as BoJ Governor Kuroda assured that they would not hesitate to ease policy if necessary.
As a result, the Japanese yen quickly fell on the news as traders took some of their bets on a rate hike after the event. Note that the market was already trending lower in the event.
Risk Environment and Intermarket Behaviors: Markets were in risk off mode around the middle of the week, after the release of downbeat US Retail Sales.
However, upbeat statements from ECB policymakers and other central bankers later turned things around, prompting a sell-off in safe-haven assets such as the yen ahead of the BoJ’s statement.
price movement probabilities
Possibilities of feeling risky: Markets seem to be in a cautious mood so far this week, as traders await another batch of high-level data (advance Q1 GDP and core PCE price index) from the US economy.
Scenarios for the Japanese yen
Base case: Traders were preparing for a somewhat dovish statement from the Bank of Japan at the start of the week, but that seems to have changed after the Bank of Japan Core CPI was released early during Tuesday’s trading session. If we see a hot print from the Tokyo CPI on Friday (just a few hours before the BoJ statement), that could mean continued strength in the meeting.
With new governor Ueda just beginning to fit into the driver’s seat, he’s unlikely to turn things around during his first policy statement yet. Unless we see a strong CPI reading in Tokyo on Friday, he will likely repeat what he has been known to favor: easy monetary policy and his intent to maintain an accommodative stance.
If the yen continues to rally in the event, this scenario could lead to a weekend selling of the yen due to profit taking buyers and traders looking to play monetary policy divergence between the Bank of Japan and the rest of the major central banks.
In this scenario, do some extra work on USD/JPY, EUR/JPY and GBP/JPY for potential short technical setups for the Japanese yen, especially if risk sentiment turns to risk ahead of the weekend.
Alternative scenario: This week CPI issues a surprise to the upside and the central bank is upgrading its economic estimates, prompting policymakers to acknowledge that their easing efforts are paying off and we hear it is time to reverse some measures.
This could lead to a rally in the yen, which has been under downward pressure since news spread that Ueda will succeed former governor Kuroda.
Optimistic forward guidance on potential YCC adjustments in the coming months could send the yen higher.
And if the overall risk sentiment tends to be negative during the session, check AUD/JPY, CAD/JPY, and NZD/JPY for short-term technical setups for the yen in case volatility continues higher into the weekend.
Whichever scenario you throw out for the Japanese yen this week, remember that the yen is closely and negatively correlated with risk appetite broadly (eg, risk-off sentiment tends to push up the yen and vice versa). So pay close attention to market behavior when evaluating your next move in the Japanese Yen, especially if the BoJ statement fails to elicit a significant reaction from traders.