USD/JPY traces firmer yields around 132.50 as BoJ defends easy policy, central banks eye liquidity infusion

• USD/JPY rebounds from five-week low, grinds near intraday high of late.
• BoJ Summary of Opinions suggests board members saw the need to maintain ultra-loose monetary policy.
• Coordinated central bank efforts to infuse US Dollar liquidity, UBS-Credit Suisse deal propel yields after last week’s heavy fall.
• Fed’s reaction to banking crisis becomes crucial for clear directions.

USD/JPY consolidates the biggest weekly loss since January while bouncing off a five-week low to 132.50 during early Monday. In doing so, the yen pair tracks the recovery in the US Treasury bond yields to begin the key week on a firmer footing after marking a three-week losing streak in the last.

That said, the US 10-year Treasury bond yields rise six basis points (bps) to 3.49% while the two-year counterpart also adds five bps to print a 3.93% coupon at the latest. It’s worth noting that United States two-year Treasury bond yields marked the biggest weekly loss in three years while the 10-year counterpart dropped the most since early January.

As per the latest Bank of Japan (BoJ) Summary of Opinions, the board members saw the need to maintain the ultra-loose monetary policy for now, even as some warned of the need to scrutinize its side effects such as deteriorating market functions.

Also read: BOJ board sees the need to maintain easy policy

Adding strength to the USD/JPY rebound could be the news shares by Yomiuri saying that the Japanese government eyes efforts worth two trillion Yen to defend the economy from slipping back into the deflation zone.

Apart from the likely continuation of the BoJ’s ultra-easy monetary policy, the news suggesting the global central banks’ joint efforts to boost the US Dollar liquidity and the UBS-Credit Suisse deal also allowed the USD/JPY to recover.

The Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Federal Reserve, and Swiss National Bank are all up for announcing joint actions to provide more liquidity via standing US dollar liquidity swap line arrangements. Further, Sky News reported the news of the UBS-Credit Suisse takeover on Sunday evening while stating that UBS will pay 3 billion Swiss francs (£2.6bn) to acquire Credit Suisse. The news further adds that UBS has agreed to assume up to 5 billion Francs (£4.4bn) in losses, and 100 billion Swiss Francs (£88.5bn) in liquidity assistance will be available to both banks.

On the same line were the comments from the US Federal Deposit Insurance Corporation (FDIC) mentioning that the deposits of Signature Bridge Bank will be assumed by a subsidiary of New York Community Bancorporation.

Amid these plays, S&P 500 Futures reverse the previous day’s losses with 0.60% intraday gains around 3,970.

Moving forward, the bond market moves will be crucial for the USD/JPY pair traders to watch. Additionally important will be Federal Reserve (Fed) action. It should be noted that the Fed is up for a 0.25% rate hike on Wednesday but the rate lift isn’t crucial as it’s mostly priced in. More important is the Fed’s outlook on the banking sector and the US economy, as well as the rate hike trajectory, moving forward.

Technical analysis

Despite the latest rebound, a daily closing beyond the 50-DMA hurdle surrounding 132.50 becomes necessary for the USD/JPY bulls to retake control. Until then, the Yen pair sellers keep eyes on a nine-week-old upward-sloping support line, near 130.40 by the press time.