Week Ahead: Can USDJPY break below 200-day SMA?

After the Fed, BOE and the ECB have all had their say this week, up steps the Bank of Japan over the coming week, amid these other scheduled economic data releases and events:

Monday, December 19

• NZD: New Zealand 4Q consumer confidence
• EUR: Germany December IFO business climate

Tuesday, December 20

• NZD: New Zealand November external trade, December business confidence
• AUD: Reserve Bank of Australia meeting minutes
• CNH: China loan prime rates
• JPY: Bank of Japan rate decision
• EUR: Eurozone December consumer confidence
• CAD: Canada October retail sales
• Nike earnings

Wednesday, December 21

• NZD: New Zealand December consumer confidence
• Crude: EIA weekly oil inventories
• CAD: Canada November consumer price index (CPI)
• USD: US December consumer confidence

Thursday, December 22

• GBP: UK 3Q GDP (final)
• USD: US weekly initial jobless claims; 3Q GDP

Friday, December 23

• JPY: Japan November CPI, BOJ releases October meeting minutes
• USD: US November PCE deflator, personal income and spending; December manufacturing activity, consumer sentiment (final)

 

To be clear, the Bank of Japan is not expected to change anything next week: no rate hike, no policy adjustments, nada.

However, it’s what the BOJ Governor Haruhiko Kuroda says about plans for policy changes in the future, that might be catalyst for major moves for the Japanese Yen.

In the lead up to next week’s meeting, several BOJ officials are reported to be open to reviewing their policy settings in 2023.

Markets now need confirmation from the BOJ’s top boss.

 

BOJ wants stronger demand-pull inflation before exiting negative rate regime

Keep in mind that, as the rest of the world embarked on an aggressive series of rate hikes in 2022, Japan’s policy balance rate has remained rooted in negative territory, currently at -0.10%.

This is because the BOJ wants to see inflationary pressures become more entrenched in the world’s third largest economy.

Against such a context, we’re due to learn of Japan’s national consumer price index (CPI) – which measures inflation - a week from today:

• The November CPI is forecasted to reach 3.9%, which would be almost double the BOJ’s 2% target.
   
• A 3.9% print would also be its highest since January 1991.

 

However, the BOJ believes even these higher CPI prints are only reflective of higher costs, as opposed to stronger consumer demand that’s pushing these prices higher.

Hence, given the forward-looking nature of the markets, the mere hint that the BOJ is finally ready to hop onto this global policy tightening bandwagon could jolt the Japanese Yen.

 

JPY bulls ready to pounce

Note how the Japanese Yen remains the worst-performing G10 currency versus the US dollar in 2022, despite recovering by some 10% since weakening to almost 152 against the greenback back in October.

 

Hence, Yen bulls are raring to go, eager to make the most out of every opportunity to extend JPY's recovery after being bashed for most of this year.

 

200-day SMA key support for USDJPY

Looking at the charts, Yen bulls have struggled to push USDJPY below its 200-day simple moving average (SMA) so far this month. This widely-used technical indicator has acted as a crucial support level.

However, this key support level could be broken by hawkish signals out of the BOJ over the coming week.

Hawkish signal = Governor Kuroda confirms that he and his colleagues are willing to review the central bank’s policy settings in 2023.

 

A successful break below its 200-day SMA may even see yen bulls sizing up a new cycle low below 133.620.

 

On the flip side, if the BOJ persists with its dovish messaging, still keeping its policy settings untouched for the foreseeable future, that may prompt USDJPY to retest resistance around the 139 region which has served as a key battle ground between bulls and bears in 2022.

A breach of the psychologically-important 140 mark may invite Yen bears to have USDJPY revisit the previous cycle high around 142.25.

 

USDJPY Bank of Japan BoJ Japanese Yen negative interest rates inflation