On Wednesday (March 20), the USD/JPY exchange rate successfully broke through the 151.20 mark, reaching a maximum of 151.33, a new high since November 16. This is a noteworthy event. The Bank of Japan raised interest rates for the first time in 17 years, announcing that it had abandoned its negative interest rate policy, raised interest rates from -0.1% to 0%, and abandoned its yield curve control (YCC) policy, but maintained its ETF purchase policy until further notice. This move triggered market expectations for the depreciation of the yen and triggered a series of market analysis and analyst opinions.
(Daily chart of USD/JPY, source: Yihuitong)
Market analyst Matt Simpson pointed out that the general depreciation of the yen shows that the market has already priced in this and expects the Bank of Japan to further implement tightening policies. The U.S. dollar/yen exchange rate, the leader of the Japanese yen currency pair, rose nearly 1.2% on the day, marking its largest single-day increase in six weeks and the second-highest increase since early November last year. Meanwhile, the GBP/JPY pair broke above highs from earlier this year to reach its highest level in seven months, while the EUR/JPY pair also hit a new high, albeit retreating before the New York close. The depreciation of the yen helped the Nikkei 225 rise for a third consecutive day, closing at just over 40,000 points.
According to Bloomberg, the market has fully priced in the 10 basis points rate hike that the Bank of Japan may implement at its next meeting, but it is not fully convinced of the early interest rate hike. The relative strength of the major FX currencies was clear from their moves against the Japanese yen on Tuesday. GBP and EUR have been standout performers, having broken out of their cycle highs, although USD/JPY has seen the biggest gains of the day. Although the New Zealand dollar rose on the day, compared with the performance of other major currencies against the Japanese yen, it has slipped since February and is obviously the weaker one.
For traders, the key question now is whether the Bank of Japan or the Ministry of Finance will publicly intervene in the yen’s decline, as they have in the past. Matt explained: “While they remain determined not to fight the yen’s depreciation, they also don’t want to see the yen depreciate too quickly. Given the level at which the yen is currently trading and the speed of its decline, yesterday’s across-the-board decline will undoubtedly make Officials were surprised.” He further pointed out: “If the current level and direction of volatility persist, this may prompt verbal intervention from officials at the Bank of Japan or the Ministry of Finance.”
In terms of technical analysis, USD/JPY quickly rose after finding support around 149 and continued to hit 1-day and 1-week implied volatility levels following the Bank of Japan’s interest rate hike. Matt added: “But to me, the fact that it has stalled below 149 and around the original 1-week implied volatility level suggests that it may need to pull back. We are already seeing this in Asian markets today. Signs.” The relative strength indicator RSI (14) showed bearish divergence from overbought territory, indicating that momentum is turning to the downside from 151 points. Although market expectations for the Fed meeting are more dovish, it is still possible to continue to break through 151, although it may encounter verbal intervention from the Bank of Japan and the Ministry of Finance when approaching 152. Ultimately, expectations are for a slight pullback in Asian markets on Wednesday, with Matt doubting whether prices will fall below the 150.40-150.50 area.
At 09:12 Beijing time, the US dollar against the yen was currently trading at 151.14/16.
