Currency Analyst since 2010

USD/JPY: reasons for rangebound

Elizaveta Belugina

USD/JPY is trading sideways, and it looks like we won’t see much of a directional movement until very later this year. For the coming months the picture is more or less clear: the pair will remain range bound as US dollar lacks drivers.

The Federal Reserve will likely play for time with raising the interest rate, and the Bank of Japan is on hold without offering additional monetary stimulus. As a result, despite the general strength of American currency, the upside will be limited. Yen has already weakened much, and now when Japan’s current account has improved, the pause in its decline will continue. On the contrary, the deterioration of the risk sentiment can make the pair test lower levels.

The borders of the range lie at 122.50 on the upside and 115.50 on the downside. The pair’s dynamics within this range can be quite volatile. There's some uncertainty, and the swing will be data dependant. The most suitable trading strategy is buying on the dips.

The main risk of a breakout comes not from the US, but from Japan. According to Kozo Yamamoto, a leading expert on monetary policy in Abe’s ruling Liberal Democratic Party, the Bank of Japan must ease monetary policy on April 30. Yamamoto points out that there are signs of slowdown in Japan’s economy and inflation. March Tankan survey showed that inflationary pressure may not be increasing as quickly as the central bank expects.

The central bank has a lot of tools which it can use (increase asset purchases and reject a 0.1% floor on money market rates, etc.). Last October Yamamoto has correctly predicted the BOJ’s latest round of QE as well as the delay of the second sales tax hike.

Many members of the BOJ are against of expanding stimulus in the near future. However, the falling oil prices can make them change their mind. The majority of analysts expect Japanese central bank to act this year, though only few think that it will ease in April.

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