Market update: Japanese yen gains again as dollar wilts, BoJ policy in the spotlight

The Japanese yen continued its strong gains against the United States dollar on Monday, as the monetary conditions in both Japan and the US align in a way not seen for decades.

Bank of Japan's potential pivot from decades of stimulus

There's a growing market consensus that the Bank of Japan may be ready to scale back some of the extraordinary monetary stimulus it has implemented since the early 1990s, aimed at stimulating domestic pricing pressures. Finally, there are signs of these pressures, with a possibility they might sustain as wages increase.

Japan has maintained negative short-term interest rates for years, alongside a substantial central bank asset purchasing programme. The yen has traditionally lagged behind its peers in yield terms and has often been bid down as a result.

BoJ's ETF market absence: a signal of change?

Reports on Monday indicated that the BoJ was absent from the exchange-traded-fund market, perhaps signalling a pullback from these extensive stimulus efforts. However, given the Nikkei's current levels, it may be that the BoJ has deemed further assistance unnecessary.

The BoJ is set to meet for its next monetary policy decision on 19 March. It's worth noting that the market has prematurely anticipated a policy shift before, only to be disappointed. However, this time the circumstances might truly be different.

Fed's rate cut expectations and the dollar's dilemma

Regarding the dollar, the prevailing expectation that the Federal Reserve will cut rates in the second half of the year continues to dominate market sentiment, further encouraged by recent remarks from Chair Jerome Powell. This outlook has generally weakened the greenback, but its struggle against the yen is notably pronounced.

The forthcoming US inflation data on Tuesday represents the week's primary short-term risk event. Any unexpected increase could cause dollar sellers to hesitate, but anything less is likely to extend the dollar's decline.

USD/JPY technical analysis

February's trading activity saw USD/JPY drop below the medium-term uptrend that had been established since 2 January.

The decline on 29 February beneath this trend line signalled further significant drops, with dollar sellers now challenging the second Fibonacci retracement of the rise to mid-February's highs from early January's lows, located at 146.84. It will be intriguing to observe whether this level holds by the close of Monday's trading.

Should this level not hold, the focus will shift to the 200-day moving average at 146.023, followed by another retracement level at 145.586.

For a market turnaround, bulls must overcome resistance at the former range base of 149.079. However, there's little indication they can achieve this, with any temporary halt in dollar depreciation likely serving merely as a consolidation phase for bearish traders.

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