The USD/JPY pair has been in a pretty rough spot this week. The pair is now in a consolidation, which, according to analysts, might turn into the next tsunami soon. But which currency will be on the crest of the wave and which one will go to the bottom?
Fingers crossed, the yen waits for a new head of the Bank of Japan
The Japanese currency suffered a shattering drop at the beginning of the week. The JPY plummeted by more than 1% against the dollar on Monday under the pressure of rumors about a possible nomination of a dovish politician to the post of the BOJ Chairman.
Recall that Haruhiko Kuroda, who came to power back in 2013, is currently the head of the BOJ. The official is an ardent supporter of an ultra-easy policy, which implies control of the yield curve and ultra-low interest rates.
Japan has been going for the dovish route for more than 9 years, but it felt the strongest side effects of accommodative policy last year when the world was slammed by inflation and many central banks went on a tightening spree.
However, Japan did not succumb to the global trend, even though it itself was in an inflationary vise. This has taken a heavy toll on the national currency. Last year, the yen fell against the dollar to 32-year lows.
A glimmer of hope that the BOJ might abandon its marginal stance emerged in December when the central bank decided to tweak its yield curve control policy.
The move, which was called a technical measure by Japanese officials, was interpreted by many traders as a hawkish signal, which was a great driver for the yen.
Since then speculations about the possible pivot from the BOJ began to be actively discussed in the market. And they were fueled by the fact that the countdown has already started for the acting head of BOJ.
Kuroda's term ends on April 8. Now the government of Japan faces the important task of choosing a worthy successor who would be able to lead the country out of the deadlock.
Until this week, yen bulls were counting on a more radical official to be the next BOJ head, but on Monday, the country's leading economic newspaper Nikkei blew the bulls' horns.
Deputy Governor Masayoshi Amamiya has been approached by the Japanese government for the role, the Nikkei daily has reported.
Given the former merits of this official in implementing soft monetary policy in the country, investors have almost buried their hopes for the BOJ. Once in power, Amamiya is likely to maintain the regulatory status quo, which would put the yen in jeopardy once again.
"Amamiya's appointment would be most supportive of USD/JPY upside," says economists at OCBC.
Of course, Amamiya's nomination is not a done deal yet. The Japanese government should name the candidate this week or next week.
But analysts and market participants alike are showing surprising solidarity on the issue. They believe that we are unlikely to see a new broom sweeping in conservative Japan anytime soon.
The dollar is hoping for strong inflation data
Recall that on Tuesday the balance of power in the USD/JPY pair changed sharply. The U.S. currency fell against the yen by 1.2%, not getting a hawkish momentum from Federal Reserve Chairman Jerome Powell.
After the release of the strong U.S. jobs report for January, which was released late last week, dollar bulls perked up and waited for the latest macro data to force the Fed chair to take a more aggressive stance.
Investors saw that the U.S. labor market remained extremely resilient. This has heightened market fears about future growth in consumer spending, which could trigger higher inflation.
But Powell did not live up to market expectations and brushed off all speculation on the topic when he spoke at the Economic Club in Washington on Tuesday. Instead, he spoke about the downtrend in consumer prices again.
The word "disinflation," which sent the dollar into a massive sell-off last week, is also putting pressure on the dollar this time, but the effect is not so strong and lasting.
The greenback recovered most of its losses fairly quickly, getting support from hawkish comments from other Fed members on Wednesday.
At the middle of the work week, New York Fed President John Williams stepped up the rhetoric about further tightening in the U.S. He said that raising interest rates to the 5.00-5.25% range seemed the smartest way to reduce the supply-demand imbalance.
And so the dollar felt a slight surge of strength against the yen. Yesterday, it strengthened against the Japanese currency by 0.25% to 131.54.
Today, USD/JPY keeps trading in the sideways channel, trapped within the 20/50 EMAs and it looks like it won't be able to get out of that range till the end of the week. Because of the lack of important events in the economic calendar, the asset will move around the well-studied 130.70-132.72 area.
However, next week, the pair might show a strong surge of volatility, analysts warn. A key trigger for the pair will be the release of the U.S. Consumer Price Index for January.
According to analyst Simon Moore of Forbes USA, this report may not be as upbeat and encouraging as previous inflation data.
"To be clear, recent inflation data has been broadly encouraging. Inflation has trended lower due to easing energy and food costs. Certain energy prices, such as crude oil, are no longer declining. However, housing costs, which carry the largest single weighting in the CPI report, continues to rise strongly. Also, the Fed worries about wage growth continuing to push services costs higher, and you have very good reason to believe that U.S. inflation may rise more in January than economists expect," said Moore.
The expert believes that upcoming CPI reading will be important to the Fed and markets. "If CPI data shows prices not moderating as fast as the Fed would like, then that could be further justification for another rate hike in May."
Also, Moore does not rule out the possibility that a more robust inflation could spark market speculation about another round of tightening in June. All of this would be favorable to widespread growth in the dollar.
Goldman Sachs analysts also see potential for the U.S. currency to climb in the medium term, especially in the USD/JPY pair.
"The combination of our baseline views for 2023 of no recession, higher US yields, and the continuation of YCC in slightly different form argues for a period of renewed Yen weakness," Goldman Sachs note.
