USD/JPY climbs as Bank of Japan announces emergency meeting

New funding program expected

The BoJ called for an emergency meeting on Tuesday, citing ‘possible new measures to provide funds to financial institutions’ in their announcement. With BoJ governor Haruhiko Kuroda having alluded to the possibility previously, this perhaps bring across little surprise to the market at this point, though the question remains as to what may be delivered.

Broadly, the BoJ’s main source of monetary policy transmission is expected to remain unchanged. This is with regards to the negative interest rate policy (NIRP) under the Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control (YCC) regime. Further easing of interest rates from the current -0.1% is widely expected to do little to stimulate the economy that last saw a second consecutive quarterly shrinkage in GDP at an annualized rate of 3.4% in Q1. Consensus from Bloomberg’s polls had also seen economists looking for an unchanged policy rate through 2020.

While the BoJ’s supportive stance had been channelled in the last monetary policy meeting in April through signalling the intent for unlimited JGB purchases, there had also been a recognition that more needs to be done to meet the pressing needs of businesses amid the Covid-19 hit to the economy. The central bank had also placed ‘a new measure to provide funds for financial institutions’ up for consideration according to the April meeting statement with the aim of providing support for small and medium sized-firms. The upcoming emergency meeting is expected to be the avenue to release the details. Any further assistance announced would likely be one help to shore up support for sentiment even as the BoJ’s growing balance remains an issue to consider.

USD/JPY finds improved correlation with equities

With hopes for further support, USD/JPY (大口） can be seen charging to a 1-week high above $107.50 levels. To a large extent, hopes for a Covid-19 vaccine had also underpinned the gains for this risk barometer pair at the start of the week.

USD/JPY which had earlier seen a tumultuous couple of weeks amid the Covid-19 shock had recovered some of the correlation with equities, once again behaving more like the safe haven it is widely regarded to be. On this front, however, we do note a downtrend having been seen for the pair though prices look to be eyeing a breakout from the channel resistance. Given the expectation for a continued weak macro environment amid the indeterminate timeline for a Covid-19 vaccine to come by, the bias remains on the downside though any breakout would be one to watch. Selling interest could mount at the $108 figure, serving as a strong resistance.