This article was written by Jarratt Davis. Jarratt is a professional trader and educator and owner of www.jarrattdavis.com.
During the penultimate week of April the yen began to depreciate across the board, after rallying aggressively for the previous several months, fueled by risk-off sentiment. The new weakness in yen was mainly prompted by speculation that the BoJ will ease monetary policy further at its meeting on Friday, April 28.
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If the bank does increase its QQE program by a substantial amount, and widen the application of negative rates, then we will likely see a sustained rally in yen pairs across the board.
The strength of the yen during the first quarter of 2016 is a major factor that has increased speculation of BoJ easing further, as a stronger yen greatly hinders inflation.
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The BoJ’s own measure of inflation excluding food and energy remained at 1.1% y/y for February, unchanged from January but down from 1.3% in December. A further fall in this metric would certainly prompt speculation of further easing by the bank.
CPI from the statistics bureau also remains relatively stable, with Tokyo CPI excluding food and energy for March at 0.6% y/y and 0.5% for the month.
Nationwide CPI excluding food and energy for February rose 0.8% y/y and and 0.2% for the month. The market will continue to closely monitor core inflation measures from Japan in order to predict the BoJ’s next move.
The Japanese yen is fundamentally a bearish currency, but only recently has sentiment on the currency also turned bearish, in the lead up to the April 28 meeting. The yen is likely to remain on the back foot heading into that meeting and an expansion of BoJ easing will most likely reinforce the yen’s position as a fundamentally bearish currency.