USD/JPY downside risks

Bank of Japan’s limited tool box

The Bank of Japan (BoJ) held steady in their latest October meeting, largely within the market’s expectation following reports that the central bank may be holding fire. Forward guidance had nevertheless been altered in a dovish manner with the line suggesting rates ‘to remain at their present or lower levels’, hinting at a possible move going into December, though this was also within anticipation.

With little surprises, the Japanese yen was seen little moved following the meeting. Indeed, the trajectory of the yen itself of late had perhaps provided little impetus for the BoJ to move. More importantly, however, it does look like the BoJ’s intention to hold monetary policy steady while the Federal Reserve fire away with insurance cuts reflects the limited room the Japanese central bank currently have. Even if a move should come through into December, there could be limited action thereafter. This runs the risk of having little to arrest the yen strength if that should result in any turn for the worse in US-China relations and global economic momentum once again. One to watch.

China’s leading indicator woes

While the BoJ meeting had not been a driver for the yen this week, the disappointment seen in China’s official manufacturing PMI had certainly been one to evoke a reaction. Arriving at the weakest reading seen since February, the 49.3 contraction reading saw to USD/JPY (大口） slipping from the $108.80 trade to $108.30 levels.

Adding on to that woes had been the update on US-China trade with reports suggesting China had been casting doubts on a long-term deal to be established with the current US President and the lack of conciliation over difficult issues ahead. This had seen to yen crosses gaining momentum and specifically the USD/JPY pair giving up the $108 support going into Friday morning here in Asia. To be fair, the update on China’s latest views should not come as too much of a surprise for the market, but the reaction seen nevertheless reflects sentiment driving the markets. While the private Caixin manufacturing gauge had deviated with a surprise at 51.7 against the 51.0 consensus, the sustained weak underlying growth momentum remains the perception.

Look to the risks for further downsides for the USD/JPY pair as we scrutinize October data streaming in. Expectation for a ‘Phase One’ deal signing between US and China appears largely to be within the price, but it will be the path forward that will be the key here. The cruel fact is that uncertainty sustains and that keeps the bias as told to the downside.

Source: IG Charts

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