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The yen took directional cues from risk appetite and bond yields last week. Will this week’s BOJ policy decision and Japan’s CPI release give it its own rhythm this week?

BOJ’s policy decision (Jan. 23, Asian session)

Tomorrow’s Asian session trading promises to be an eventful one with the Bank of Japan (BOJ) scheduled to print its January monetary policy decision.

While the central bank isn’t expected to make any policy changes, it’s possible Governor Kuroda and his team could start talking about some form of exit plan that they could execute as early as this year.

Of course, they could also use the opportunity to tell market players that they are getting ahead of themselves and choose to jawbone the currency instead. Either way, make sure y’all keep your eyes peeled for the decision!

Japan’s inflation numbers (Jan 25, 11:30 PM GMT)

On Thursday’s Asian session trading we’ll see Japan and Tokyo’s core CPI numbers. Consumer prices ticked higher from 0.8% to 0.9% in November, which puts the BOJ closer to its 2.0% target.

This time around traders are expecting to see prices steady at a 0.9% growth. Meanwhile, Tokyo’s core CPI – usually a leading indicator of Japan’s overall prices – is expected to show another 0.8% growth for the month.

Stronger numbers could inspire more rally for the yen, while weaker readings could support whatever jawboning BOJ members make (if they choose to go that route) in their policy decision printed on Tuesday.

Overall risk appetite

As you can see in the recap below, the yen mostly danced to the tune of global bond yields and overall risk appetite.

And with the ECB also printing its policy decision AND the U.S. government shutting down, it looks like risk appetite is in for another roller coaster ride this week. Pay attention to updates that could set intraweek trends for the low-yielding yen!

Last Week’s Price Review

The yen steamrolled its peers last week, but it had an unfortunate reversal of fortune this week since it’s currently on course to finishing as the second worst-performing currency after the Greenback.

Overlay of Inverted JPY Pairs & US10Y Bond Yield (Black Line): 1-Hour Forex Chart
Overlay of Inverted JPY Pairs & US10Y Bond Yield (Black Line): 1-Hour Forex Chart

As you see in the overlay of inverted yen pairs and the yield of benchmark 10-year U.S. government bonds, the yen is apparently taking directional cues from bond yields again after decoupling from bond yields last week, due to growing speculation that the BOJ may tighten monetary policy.

And since bond yields surged because of higher U.S. inflation expectations and China’s net positive GDP report, the yen ended up getting a painful beat-down.

This is not a very surprising development, I suppose. After all, I did note in last week’s JPY recap that the yen was beginning to take directional cues from bond yields again last Thursday.

The yen did have a more mixed performance on Thursday and Friday, though, since there were signs of yen demand, despite rising bond yields. One possible reason is safe-haven demand because of returning risk aversion during Thursday’s U.S. session.

Safe-haven flows because of worries related to U.S. government shutdown fears may have also helped to lessen the yen’s vulnerability to the rise in bond yields and may have even helped the yen take back some lost ground on some pairs.