Japanese markets were hit by the highest volatility in the observed period of five months as investors are rapidly increasing bets that the Bank of Japan will raise rates next year.
On Thursday, Bank of Japan Governor Kazuo Ueda told parliament that the central bank would face an “even more difficult” year before it embarks on an exit from decades of ultra-low interest rates. It was taken as a sign of change to come by traders.
The Bank of Japan will make a decision on interest rates at its next meeting on Dec. 19.
“This may prove to be too soon for large steps to be unveiled, but we believe it is a matter of when, not if, the BoJ jettisons its negative interest rate regime,” said Corpay currency strategist Peter Dragicevich.
“This eventual turn and the capital flow implications underpins our forecasts looking for the ‘undervalued’ yen to strengthen over the next year. This is also one of the pillars behind our outlook for the dollar to weaken.”
Japan's bond market remained under heavy pressure, with the 10-year government bond yield up almost 15 basis points in two sessions to 0.79%, although still well below the BOJ’s soft cap of 1%.
Data showing Japan’s economy fell faster than first estimated in the third quarter, as the household sector faced growing headwinds, complicates the central bank’s outlook.
The strong downward movement of USDJPY caused by this news pushed the currency pair into a technical oversold zone.
The report that could trigger a reversal of the upward movement and an exit from the oversold condition is today’s U.S. nonfarm payrolls.
If the labor market figures turn out to be hot, it will cause an instant strengthening of USDJPY to the level of 146.0.
The final recommendation is to buy USDJPY if the U.S. nonfarm payrolls are above 200K and the unemployment rate is below 3.9%.
The profit could be fixed at 146.0. The loss — at 141.5.
This content is for informational purposes only and is not intended to be investing advice.
