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USD/JPY Fundamental Daily Forecast – March Rate Hike is Priced-in, Future Rate Hikes Are Not

By:
James Hyerczyk
Published: Mar 21, 2018, 05:41 UTC

Investors are most likely to react to any hints offered by the Fed about whether the central bank will stay on track for three rate hikes in 2018 or if it expects to be more aggressive by forecasting four rate hikes.

USD/JPY

The Dollar/Yen rebounded from Monday’s losses following comments from Masayoshi Amamiya, one of the two new deputy governors at the Bank of Japan. Amamiya told reporters earlier on Tuesday there is a need to stick with an easy monetary policy to support the economy.

The USD/JPY settled at 106.530, up 0.444 or +0.42%.

USDJPY
Daily USD/JPY

Amamiya and Masazumi Wakatabe, the other new deputy governor, began five-year terms on Tuesday. Speaking at their inaugural press conference, both offered commentary on BOJ monetary policy, but only Amamiya’s comments had an impact on the USD/JPY.

“Conceptually and theoretically, we haven’t ruled out the possibility of adjusting the yield curve” Amamiya said in response to a question about whether the BOJ could adjust rates before inflation reached the 2 percent target. “However, we are not at the point of considering that at the moment.”

Wakatabe’s comments were less aggressive compared with what he said before his nomination for the position.

“It’s true that I have advocated aggressive monetary policy but here on I’m going inside the BOJ as a deputy governor,” said Wakatabe. “I will have new data and information, and there will be discussions with my fellow board members. Considering that, it’s of course possible to update and modify my thinking.”

“I expect my knowledge and judgment will be updated through working in finance as a deputy governor,” Wakatabe said.

Wakatabe was critical of BOJ policy before he was nominated to the board, and called for extra stimulus in December. In an interview at that time, he said the BOJ should expand stimulus to meet the price goal before the sales tax is hiked in October 2019.

Forecast

On Wednesday, the price action in the Dollar/Yen is likely to be dictated by the U.S. Federal Reserve’s interest rate decision, monetary policy statement and economic projections.

According to the CME Group’s FedWatch tool, market expectations for a March rate hike are 94.4 percent as of Tuesday afternoon.

Given this certainty, investors are most likely to react to any hints offered by the Fed about whether the central bank will stay on track for three rate hikes in 2018 or if it expects to be more aggressive by forecasting four rate hikes. The Fed’s dot plot projections will reveal if the central bank believes an overheating economy needs to be cooled off by more aggressive monetary policy.

The USD/JPY could rally if the Fed is hawkish in its tone. A dovish Fed could trigger a steep break. However, keep in mind that investors are still concerned about a trade war, possible tariffs against China, elevated volatility and rising negative sentiment. These factors could limit gains or accelerate any sell-off.

As of Tuesday’s close, futures market data from the CME Group shows the chances of rates going up more than three times this year is around 40%, compared with 25% a month ago.

Traders will also get the opportunity to react to the U.S. Existing Home Sales report. It is expected to come in at 5.41 million, up slightly from 5.38 million. Early Thursday, Japan will release data on Flash Manufacturing PMI.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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