Week Ahead: USDJPY to form bearish cross?

The week following the Christmas weekend features sparse economic data releases and events, as markets wind down 2022.

As much of the western world continues revelling in the festivities, markets may adopt a more Asian-centric focus over the coming week:

 

Monday, December 26

• JPY: BOJ Governor Haruhiko Kuroda speech
• US, UK, and European markets closed

Tuesday, December 27

• CNH: China November industrial profits
• JPY: Japan November retail sales, jobless rate
• UK markets closed

Wednesday, December 28

• JPY: Bank of Japan summary of opinions, Japan November industrial production

Thursday, December 29

• EUR: ECB releases Economic Bulletin
• USD: US weekly initial jobless claims

Friday, December 30

• US bond market closes early

 

The Japanese Yen could receive special attention, in light of the recent stunner by the Bank of Japan.

In case you missed it, on December 20th, the BoJ unexpectedly widened the band on 10-year yields, which also doubled the ceiling from 0.25% to 0.50%.

The Japanese Yen soared alongside the surge in yields, with markets now believing that this week’s policy tweak paves the way for an eventual rate hike by the Bank of Japan in 2023.

Following the recent policy shocker, Governor Haruhiko Kuroda harped on the idea that the tweak to the BoJ’s yield curve control programme was not a rate hike.

Yet, markets believe otherwise.

At the time of writing, markets are forecasting 4 rate hikes by the BoJ in 2023, with the first perhaps to be triggered in April, when Kuroda steps down as the central bank governor.

READ MORE: Why is the Japanese Yen soaring?

 

Such expectations will frame BoJ Governor Haruhiko Kuroda’s speech on Monday.

If Kuroda lets slip more hawkish policy clues, that may translate into JPY strength before this calendar year is over.

And the JPY could push higher if the following economic data out of Japan over the coming week also point to some resilience in the Japanese economy, which would lower the bar for BoJ rate hikes in 2023.

 

2 reasons for the Yen’s pullback today (Friday, Dec 23)

1. Japan’s (slightly) lower-than-expected November inflation
   
   Japan’s National consumer price index (CPI) released earlier today (Friday, Dec 23) came in at 3.8% for November, a touch below market forecasts of 3.9%.
   
   That is casting slight doubts on whether Japan’s inflation is problematic enough to warrant a BoJ rate hike, with such doubts perhaps prompting the paring of JPY’s gains against all of its G10 peers.
   
   Yet, that 3.8% headline inflation figure is still rising at its fastest pace since 1981.
   
   That suggests that the BoJ would ultimately have to make a pivot away from its ultra-dovish stance, having kept its benchmark rate unchanged at negative 0.1% all of this year. That’s in stark contrast to its global peers have been hiking aggressively to combat the inflation scourge.

 

2. Recovery from “oversold” conditions
   
   USDJPY’s 14-day relative strength index has recently bounced off the 30 threshold which denotes ‘oversold’ conditions (this currency pair fell too far too fast).
   
   However, once the froth has been cleared, it could pave the way for further declines for USDJPY.

 

Potential technical catalyst for further USDJPY declines

At the time of writing, note how this currency pair’s shorter-term 21-day simple moving average (SMA) is just pips away from dropping below its longer-term, 200-day counterpart.

Such a bearish technical event may send USDJPY even lower.

However, USDJPY bears must first overcome a key support region around the 131.0 mark, which helped shored up this FX pair back in August, while also serving as a crucial resistance level back in April/May.

 

Hence, this coming week’s combo of:

• fundamental factors: Kuroda speech, Japan economic data
• technical factors: bearish cross?

 ... may combine to force USDJPY even lower over the coming week and set the tone for USDJPY in 2023, especially given market expectations for the eventual BoJ rate hike(s).

 

USDJPY Japanese Yen Bank of Japan BoJ rate hikes inflation