The Bank of Japan triggered a sharp fall in the yen today by announcing that it will continue to defend the target yield on government bonds, which is at a rather low level. The central bank's dovish rhetoric has caused the yen to renew its level of 130 against the US dollar as other major central banks, especially the Fed, try to tighten monetary policy.
The central bank has said it will buy an unlimited number of bonds at fixed rates every working day to protect the 10-year government debt yield ceiling of 0.25%. Following the decision to leave interest rates unchanged, at -0.10%, the regulator also maintained its approach to yield curve management and the scale of asset purchases. Economists had expected this decision, despite rumors that the BoJ might take action to support the yen.
As I mentioned above, in this background USD/JPY broke through 130 compared to 128.67, where the instrument was traded before the BoJ issued its statement.To the surprise of market participants, central bank governor Haruhiko Kuroda and his board have made some more aggressive statements about the need for the central bank to change policy in order to prevent the yen from weakening further by easing upward pressure on yields.More recently, we have been saying that a further decline of the yen is evident. This is the conclusion drawn by other experts from leading rating agencies. Relying on the fact that the government is likely to strengthen its measures to help the economy due to rising energy and food prices, it would be reasonable to expect the yen to fall further against the US dollar, especially with the expectation of an interest rate hike by the Federal Reserve. Obviously, the yen is not a major part of BoJ policy at the moment. It also indicates that the regulator will once again go its own way, ignoring the actions of the Federal Reserve or the European Central Bank to tighten monetary policy.For the time being, the central bank and Prime Minister Fumio Kishida seem to have clearly separated their duties. The Bank of Japan will stimulate the fragile economy while the government tries to alleviate the impact of soaring energy and food prices, exacerbated by a weaker yen. The regulator is likely to strengthen its economic support policy in the near future, so it would be very difficult to expect currency interventions in the near future.
As I noted above, the Japanese Yen is falling like other risky assets where central bank policy is tougher and far different to what the BoJ is currently pursuing. The fact that the level around 129 and the 2015 highs were easily passed just recently indicates that there is simply no willingness to defend even the large levels around 130. As long as the trade is above 129.50, we can expect a smooth move up to 130.95 and then to 132.30, which is a longer-term level that we might reach by the middle of this summer. If the pressure on the trading instrument returns, buyers will actively defend the levels of 129.50, 128.55 and 126.90.As for other risky assets, the euro continues to update yearly lows. Support at 1.0470 is now in sight. Expectations of a more aggressive European Central Bank policy are not benefiting the euro at all as everyone is waiting for the Federal Reserve meeting in May where the interest rate could be increased by as much as 0.75% against the previously announced 0.5%. Deteriorating geopolitical tensions over Ukraine's refusal to negotiate, as well as supply chain problems in eurozone countries, will continue to limit the upside potential of risk assets. Therefore, it is better to bet on further strengthening of the dollar, although we might see a rather large correction of the pair upwards in the near future, which occurred amid profit taking after the US economic data. The slowdown in GDP growth in Q1 this year will be a major concern for the central bank. To stop the bear market, buyers need to protect the nearest support at 1.0500. If that is missed, the bears are likely to take the instrument to new lows, 1.0470 and 1.0420. Support at 1.0390 will be a further target. The Euro may correct only after the bulls gain back control of the resistance at 1.0550. From there, we might expect an uptrend towards 1.0590 and 1.0630.The pound continues to fall and no one can stop it yet. Buyers of risky assets tried to do something around 1.2500, but there are no prerequisites for finding the bottom yet. There will be bounces upwards, like yesterday's one. However, it is worth noting that the medium-term bearish trend continues to gain strength. I advise selling the pound at every decent upward correction. The nearest resistance levels are now around 1.2550 and also a little higher, around 1.2600 and 1.2640. A breakout of 1.2500 would only strengthen the bear market, which would open the way to new lows of 1.2450, 1.2380. The furthest target in current conditions would be the support of 1. 1.2320, which will be renewed very quickly should the UK economy deteriorate.
