USD/JPY: Yen renews four-month low as Bank of Japan surprises markets

• USD/JPY drops more than 3.0% to refresh multi-day bottom after Bank of Japan tweaks Yield Curve Control (YCC) policy.
• Chatters surrounding Japan’s budget, Treasury bond buying also entertain Yen traders.
• BOJ Governor Kuroda shows readiness to ease policy if needed, USD/JPY stays pressured.
• Risk aversion fails to underpin US Dollar as Federal Reserve appears less hawkish.

USD/JPY bears the burden of the Bank of Japan’s (BOJ) surprise policy tweak during early Tuesday, despite the latest rebound. While portraying the Yen trader’s mood, the quote initially slumped to the lowest levels since early August before the recent bounce from 132.66 to 133.60. Even so, the quote remains 2.75% in the red as we write.

Bank of Japan surprises markets with YCC move, drowns USD/JPY

Bank of Japan (BOJ) held its benchmark rate unchanged at -0.10% and kept the short-term interest rate target at -0.1% while directing 10-year Japanese Government Bond (JGB) yields toward zero. In doing so, the Japanese central bank matched the market expectations and should have kept the USD/JPY intact.

The surprise factor, however, was the BOJ’s alteration of the Yield Curve Control (YCC) and the bond issuance announcements. “The BOJ will expand the range of 10-year Japan government bond yield fluctuations from its current plus and minus 0.25 percentage points to plus and minus 0.5 percentage points,” reported Reuters. Following that, the Yen pair plunged to the multi-day low of 132.66 ahead of bouncing back beyond 133.00.

The BOJ not only affected the USD/JPY prices but also roiled the risk appetite and propelled the Treasury bond yields across the board, which in turn allowed the US Dollar to pare intraday losses.

BOJ Governor Haruhiko Kuroda defends Yen buyers

Having witnessed the BOJ-inflicted slump in the USD/JPY prices, Governor Haruhiko Kuroda allowed the Yen traders to lick their wounds while defending the easy money policies for one last time.

In doing so, BOJ’s Kuroda highlights the need for a 2.0% inflation target, as well as shows readiness to ease monetary policy if needed.

“Today's decision on yield curve control is not an exit of yield curve control or change in policy,” said BOJ’s Kuroda per Reuters.

Also read: BoJ’s Kuroda: Necessary to achieve 2% inflation target sustainably, stably in tandem with wage growth

US Dollar fails to cheer risk-off mood

Despite the risk-aversion wave, the US Dollar Index (DXY) remains mildly offered near 104.40, down for the second consecutive day. The reason for the USD/JPY pair’s weakness could be linked to the Federal Reserve’s (Fed) less hawkish bias, as informed via the latest monetary policy meetings, as well as the softer US Purchasing Managers’ Indexes (PMIs) for December. Also likely to have weighed on the US Dollar are the strongly hawkish statements from the European Central Bank (ECB) officials, as well as upbeat German data.

Risk catalysts will be crucial for Yen sellers

Looking forward, USD/JPY pair bears need to pay close attention to the risk catalysts and the bond market moves for near-term directions amid a light calendar. Also important will be the US Building Permits and Housing Starts could join Germany’s Producers Price Index (PPI) data to direct immediate moves. However, major attention will be given to the Fed’s preferred inflation gauge, namely Friday’s US Core Personal Consumption Expenditure (PCE) – Price Index for December, expected 4.6% YoY versus 5.0% prior.

USD/JPY technical analysis

USD/JPY extends a downside break of the 200-DMA, as well as an upward-sloping trend line from early August, towards refreshing the multi-day low.

Given the impending bear cross on the Moving Average Convergence and Divergence (MACD) indicator, as well as the downbeat Relative Strength Index (RSI), located at 14, not oversold, the USD/JPY pair is likely to extend the latest weakness.

However, the RSI (14) is near the oversold territory and hence signals limited downside room, which in turn highlights the 78.6% Fibonacci retracement level of the May-October upside, near 131.70.

Also acting as the downside filter is the August month low near 130.40 and the 130.00 round figure.

In a case where the USD/JPY rebounds from the current level, the support-turned-resistance line from August, around 134.15 by the press time, could challenge intraday bulls.

Following that, the 200-DMA hurdle surrounding 135.75 will be crucial to watch for the Yen buyers.

Above all, a two-week-old horizontal resistance area near 138.00 could restrict the USD/JPY buyers from entering the ring.

USD/JPY: Daily chart

Trend: Limited downside expected