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James Hyerczyk
USD/JPY

The Dollar/Yen is trading sharply lower on Thursday. We can tell by the price action that the selling is being driven by expectations of a U.S. interest rate cut, perhaps as early as July. If traders were concerned about increasing demand for riskier assets, or the dovish tone from the Bank of Japan, the Forex pair would be trading flat or higher.

At 07:58 GMT, the USD/JPY is trading 107.674, down 0.422 or -0.39%.

Fed Signals Rate Cut

On Wednesday, the Federal Open Market Committee (FOMC) voted 9 to 1 to keep the benchmark rate in a target range of 2.25% to 2.50%. The Fed also dropped the word “patient” in describing its approach to monetary policy. Central bankers also left the door open somewhat to future cuts. Finally, eight members favored one cut in 2019, while the same number voted in favor of the status quo, while one wanted a rate hike.

After presenting a plethora of data and projections, Fed Chair Jerome Powell held a press conference. It was at this press conference that he opened the door to the possibility of a rate cut as soon as July. He said, “Many participants now see the case for somewhat more accommodative policy has strengthened.”

Powell further added, “Overall, our policy discussions focused on the appropriate response to the uncertain environment,” he said. “Many participants believe that some cut to the fed funds would be appropriate in the scenario they see as most likely.”

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Bank of Japan Leaves Rates Unchanged; Acknowledges Downside Risks

The Bank of Japan kept monetary policy in check on Thursday, holding interest rates at ultra-low levels while saying it preferred to save its weapons at this time rather than introduce additional stimulus. The BOJ also stressed that global risks were increasing as trade tensions and uncertainty over U.S. economic policies shock financial markets, signaling that it, too, is leaning toward ratcheting up, not reducing, monetary support.

The BOJ maintained its short-term rate target at -0.1% and a pledge to guide 10-year government bond yields around zero percent. It also kept intact a loose pledge to keep buying government bonds so the balance of its holdings increase by roughly 80 trillion yen ($738 billion) per year.

“Downside risks regarding overseas economies are big, so we must carefully watch how they affect Japan’s corporate and household sentiment,” the BOJ said in a statement announcing the policy decision.

Daily Forecast

With the Fed expected to cut rates and the BOJ keeping rates steady, the interest rate differential is tightening. This is forcing portfolio managers to adjust positions to reflect the change, making the dollar a less attractive investment.

The trend is down and expected to weaken as long as the USD/JPY remains under 107.940. Overtaking this level won’t change the trend, but it will indicate the selling pressure is weakening. The nearest downside target today is 107.056.

The selling won’t last forever. If there is a surge in equity prices then the carry trade should kick in. This should reverse the USD/JPY to the upside.

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