USD/JPY Drifting Lower Ahead of BOJ Policy Announcements

The Dollar/Yen is edging lower on Tuesday for a second session as investors positioned themselves ahead of the Bank of Japan’s monetary policy meeting later this week.

At 10:32 GMT, the USD/JPY is trading 127.765, down $0.365 or -0.28%. On Tuesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) is at $73.18, up $0.31 or +0.42%.

Something Strange is Going On

I’m just going to come out and say that the price action in the Dollar/Yen has been unusual since it flirted with the 130.000 level before posting a potentially bearish closing price reversal top on April 20.

The date of the reversal top is important because it took place during last week’s G-7 meeting. Furthermore, the Dollar/Yen showed no reaction to Fed Chair Powell’s hawkish remarks that rocked the other currencies and drove the U.S. Dollar sharply higher. Additionally, other than a little safe-haven buying on Monday, Dollar/Yen traders showed little reaction to the global market volatility on Monday.

Does the price action suggest a secret deal was made at the G-7 meeting to support the Yen if it went over 130 to the Dollar? Does it suggest the Bank of Japan or the government is planning a major intervention? All we can say at this time is something happened last week that changed the sentiment in the market, suggesting it may be time to take a little of your profits off the table. Like the wise many once said, “When in doubt, get out,” or at least do some position trimming.

Bank of Japan Mission:  How to Control Low Inflation while Supporting the Yen

The Bank of Japan (BOJ) meets on April 26-27 to discuss its plans to battle weak inflation while at the same time preventing the Japanese Yen from falling further against the major currencies, especially the U.S. Dollar.

Traders are expecting the BOJ to leave its ultraloose monetary policy unchanged, while at the same time propping up the Japanese Yen as it nears 130 against the U.S. Dollar.

While Japan continues to cap its 10-year government yield at 0.25% with relentless debt buying in the open market, its 10-year U.S. counterpart is offering a yield of 2.83%. This widening of the spread between yields is what is making the U.S. Dollar an attractive investment. With the Fed expected to raise its benchmark 50-basis points after its May 3-4 policy meeting, and announce similar moves in June and July, it’s going to be difficult for the BOJ to announce a policy change that would somehow tighten the yield differential.

This strongly suggests an intervention by the BOJ may be the best and only move unless the U.S. Treasury and Federal Reserve have cooked up some other scheme to strengthen the Japanese Yen.