After a sharp fall on Tuesday, the USD/JPY pair tried to recover but failed. The pair still maintains a strong bullish bias. However, some analysts believe that the US dollar could come out on top again...
At the start of this week, the yen notched the largest intraday gain against the greenback since 1998. On Tuesday, the yen jumped by almost 4%, reaching a 4-month high of 130.58.
Its meteoric rise was bolstered by the BoJ's unexpected decision to allow the 10-year bond yield to move 50 basis points from the previous 25 basis point band.
The adjustment of the yield curve control policy by the regulator was perceived by market players as a shift to a more hawkish stance.
BoJ Governor Haruhiko Kuroda tried to calm markets, dispelling rumors of a possible rate hike. "Today's step is aimed at improving market functions, thereby helping enhance the effect of our monetary easing. It's therefore not an interest rate hike," Kuroda stressed. However, investors took his statements with a pinch of salt.
Hawkish expectations have increased markedly, boosting a further rise in the yen. This morning, the dollar/yen pair advanced by almost 0.5%.
The pair lost its modest gains received yesterday amid a strong bullish momentum.
The US currency is facing bearish pressure due to falling US government bond yields and the expectations of the Santa Claus rally on the stock market.
Traders are also cautious ahead of the US GDP report for the third quarter. The figure is expected to remain unchanged at 2.9% in annual terms.
If the reading is not in line with the forecast, it may cause sharp price fluctuations in the USD/JPY pair. If GDP undershoots expectations, this will a negative factor for the US dollar, and vice versa.
Judging by the technical indicators, the dollar/yen pair is now trading with a bearish trend, looking for a new catalyst to drop lower.
Such an event may occur at the end of the week. On Friday, the Bank of Japan will unveil its meeting minutes.
If traders see even the slightest hint of a possible stance reversal, the yen is sure to rise higher.
Otherwise, the US dollar could try to offset its early losses.
Analysts at Goldman Sachs argue that the US currency has still the chance to rebound amid the wide rate gap between the Fed and the BoJ.
They contemplate that traders are underestimating the Fed's plans for further tightening. The regulator is highly likely to keep raising rates next year. At the same time, they are rather skeptical that the Bank of Japan could undertake a rate increase.
They also believe that the adjustment of the yield curve control policy is really just a technical measure as Kuroda stressed.
The fact that the regulator has left its main monetary policy parameters unchanged outweighs the significance of a small change in the YCC, analysts emphasize.
According to their estimates, the Bank of Japan will maintain its dovish stance for at least the next few months. Against this background, the USD/JPY pair may return to its recent highs.
Jane Foley, the currency strategist at Rabobank, also expects the pair to advance next year. She believes that its rise will be fostered by an increase in the 10-year US government bond yield.
In turn, the 10-year US government bond yield is likely to appreciate by 3.82% in the second quarter of 2023, which is about 20 bps higher than the current level. It means that the spread between the yields of US Treasurers and the Japanese ones will increase again.
If this scenario comes true, the yen will certainly decline versus the US dollar. However, its decrease will hardly be as steep as this year.
The US dollar is projected to jump next year, which is likely to limit the yen's upside potential, Foley concluded.
Unlike Goldman Sachs, Rabobank does not rule out the possibility of a potential reversal in the BoJ's stance in the foreseeable future. However, analysts are confident that the Japanese regulator could do it rather slowly. Therefore, the yen will not be able to take the upper hand against the US dollar.
