If someone says that monetary policy no longer plays a key role in the course of exchange rates on Forex, do not believe it. It is enough to look at the list of the best and worst performers of G10, to be convinced of the opposite. Among the leaders are the euro, the Swedish krona, and the Norwegian krone. The situation in the economy of these areas increase the risks of abandoning QE and raising the basic interest rates. Outsiders, on the contrary, are currencies whose central banks are not going to go far from cheap money policy such as the yen and the franc. In this respect, more than 4.5% of the USD / JPY rally in early September looks quite logical.
After the Bank of Japan moved to the policy of targeting the yield curve at the end of 2016, it actually introduced the dependence of the yen’s rate on the rates of the US debt market. In this regard, the acceleration of consumer prices in the United States to 1.9% in August, the «hawkish» rhetoric of the Fed representatives, and the associated increase in the likelihood of an increase in the federal funds rate in December from 33-34% to 72-73% set the «bears» of the USD / JPY in the tap which is an uncomfortable position.
USD / JPY dynamics and US Treasury yields
Source: Trading Economics.
Additional factors of pressure on the yen were the results of the September meeting of the BoJ, the announcement of early parliamentary elections in the Land of the Rising Sun, and the immunity of the market to geopolitical factors. The Governing Council decided to retain the current parameters of monetary policy but its new member expressed dissent, saying that the current scale of monetary stimulus is not enough to carry out a 2% inflation target.
For a long time, support for the «bears» in the USD / JPY pair was provided by the information about the conflict over North Korea. However, the latest squabble between Washington and Pyongyang could not return investors’ interest to the safe havens. Donald Trump promised to wipe the enemy off the face of the earth, to which Kim Jong-Un replied, saying that the US president would pay dearly for his words. As a result, the likelihood of regular tests of North Korean weapons has increased, which forces participants in market battles to closely monitor the yen.
The decision of Shinzo Abe to dissolve the parliament and call early elections for October has been widely discussed recently. The Prime Minister can become the person who headed the government of Japan for the longest period in the history of the country. This factor is bullish for the stock market, whose close correlation with USD / JPY supports the buyers of the currency pair.
Let’s not forget that until the end of September, details of the tax reform in the US may become known. The implementation of this will allow us to count on the overclocking of GDP to 3%. This factor was not taken into account by the Fed in its forecasts. The improvement of this will increase the risks of aggressive monetary restriction and allow USD / JPY to continue the rally.
Technically, the breakthrough of the upper boundary of the downward trading channel with the subsequent successful resistance test at 112.95 will create the prerequisites for implementing the target by 88.6% for the reversed «Shark» pattern. On the contrary, the inability of bulls to hold quotations above the support level at 111.6 will be evidence of their weakness.
USD / JPY, daily chart