The yen weakened modestly against the dollar and on the crosses Monday, ahead of Tuesday’s Bank of Japan monetary policy decision.
Analysts do not expect the BOJ to change policy, and any further easing action is more likely in the fall or later in 2014, but they are keen to see the BOJ’s update on the medium-term GDP and CPI forecasts.
In recent sessions, the yen has been propelled higher, driven by unwinds of yen short positions, with dollar-yen falling from a high of Y102.27 July 3 to a low of Y101.07 July 10.
Ahead of the BOJ decision, market players have been squaring speculative yen longs and adding somewhat to yen short positions, just in case the central bank surprises, not so much with action, but with words or economic projections.
Dollar-yen was trading at Y101.58 Monday, on the high side of the day’s range of the day’s tight range of Y101.32 to Y101.62.
After closing at Y105.31 December 31, 2014, the pair peaked at Y105.44 January 2, at a time when U.S. Treasury yields were testing highs around 3.0% and the market was thinking that that BOJ might be implementing further easing measures sooner rather than later.
Dollar-yen subsequently tumbled, in line with U.S. yields, bottoming finally around Y100.76 February 4. The pair attempted to rally and this time posted a high of Y104.13 April 4, before ratcheting lower to bottom around Y100.82 May 21.
A clear-cut break of Y100.80 would target a test of the psychological Y100 mark, also the November 21 low, seen as critical support.
On the topside, the market would like to see dollar-yen vault the June 4 peak at Y102.80 and more importantly the May 2 peaks around Y103.02 before becoming convinced of a topside break of the Y101 to Y103 range.
Brown Brothers Harriman analysts noted that dollar-yen has been largely range bound from Y101 to Y103 in the past five months, with only four exceptions, three of which were seen in early February and then again May 21.
The pair only closed below JPY101 once and that was February 3, they said.
“The most interesting technical development is that for the first time since December 2012, the dollar’s 50-day moving average is set to fall below the 200-day moving average,” they said.
“This cross is sometimes referred to as the golden cross or the dead man’s cross, perhaps depending on what side of the trade one is on,” BBH added.
Some traders prefer to look at the 55-day moving average in dollar-yen instead.
The 50-day moving average comes in at Y101.88, the 55-day moving average at Y101.92 and the 200-day moving average at Y101.91.
The so called “golden cross” occurs where the short-term moving average breaks above the long term moving average. The “death cross” occurs when the long-term ma moves above short-term moving average.
In other pairs, euro-yen was trading at Y138.30, in the middle of a Y137.82 to Y138.45 range.
A move above the 200-day moving average in dollar-yen and euro-yen, at Y101.91 and Y139.39 respectively, would be deemed bullish.
On the BOJ decision, the market is looking for clarity about the health of the Japanese economy and monetary policy going forward.
“Nobody in the market is looking for an increase in QE in July or even until late this year, but the market is looking for hints as to what trigger factors would cause the BoJ to reconsider more QE,” said Greg Anderson, global head of FX strategy at BMO Capital Markets.
“The FX market seems to want to test the BoJ’s reaction function to a test of 100.00 in dollar-yen as the pair traded heavy all of last week,” he observed.
While the BOJ has been fairly silent on currency moves, a sub Y100 move would likely prompt some sort of response, he said.
“I continue to think that dollar-yen below Y102.00 is something we will look back at a year from now and consider it a gift,” Anderson said, noting dollar-yen “will cycle back as the favorite long-USD trade just as soon U.S. yields begin rising again.”
Strategists at RBC Capital Markets said the “general expectation is no change in the monetary base target or in the BOJ’s communication.”
Analysts have spent the first half of 2014 substantially cutting back or pushing forward BOJ easing expectations, they reminded.
“In the latest survey, the proportion of analysts expecting more BOJ QE at some point stood at 75%, down from 100% at the turn of the year,” the strategists said.
“More notable than the proportion of analysts that have taken out further BOJ easing, however, is the proportion that have simply pushed it further into the future,” they said. .
Only 38% of those surveyed currently looked for the BOJ to act in the remainder of this year, down from 95% at the start of 2014.
“With the evidence continuing to mount that neither QE itself, nor the JPY weakness that it ostensibly caused, is having much impact more broadly, it is likely that the creeping decline in expectations of further BOJ easing will continue going forward,” RBC Capital Markets said.
The focus Tuesday will be in the press conference by BOJ Gov. Haruhiko Kuroda, said CitiFX G-10 strategist Osamu Takashima.
“His optimistic view on the economy and inflation, or his conservative stance toward the additional easing, has supported JPY after almost every MPC meetings over the last six months,” he said.
However this time, Kuroda may not repeat the optimism of recent meetings, which has underpinned the yen.
“We suspect a more possible risk must be that he could more or less adjust his stance this time, intending to curb further JPY rebound,” Takashima said.
“We would see an upside risk for dollar-yen with Kuroda at the meeting tomorrow,” he said.