Now that the BOJ has said its piece, will the yen go back to exclusively taking cues from risk sentiment?
Here are this week’s potential catalysts:
Preliminary GDP (Aug 9, 11:50 pm GMT)
There are tons of lower-tier data scheduled in Japan this week, but they don’t really tend to cause sustained price reaction from the yen.
Our best bet is the preliminary quarterly GDP report, which is expected to show a 0.3% growth and an annualized rate of 1.4% as capital spending and private consumption help boost the economy.
Remember that the BOJ recently downgraded its GDP outlook for 2018 so that hitting a 1.4% growth would be right smack in the middle of its forecasts.
Overall risk sentiment
Now that the BOJ has shared its plans to keep rates low for longer and continue its easy monetary policy, the yen will likely go back to taking cues from risk sentiment.
This week pay close attention to how the Trump administration plans to react to China’s latest threats of slapping additional tariffs on $60B worth of U.S. goods.
The U.S. is already planning on adding taxes to $200B worth of Chinese products, so an escalation of its current plans could heat up global trade-related concerns. Meanwhile, news of negotiations between the world’s economic superpowers could inspire risk-taking across the board.
Last Week’s Price Review
The yen is currently a net loser (as of 8 am GMT). It’s still to early for the yen to say goodbye to its two-week winning streak, though, since the yen is currently on the rise and may soon overtake the Aussie.
Like last week, the yen didn’t track bond yields closely this week, especially on Tuesday and Wednesday.
So, what happened on Tuesday and Wednesday? Well, as marked on the chart above, the BOJ announced its latest monetary policy decision on Tuesday, which is almost miraculous since It’s been a while since the yen actually reacted to the BOJ.
As for specifics, the BOJ tweaked its forward guidance to also include interest rates. And unfortunately for the yen, this is what the BOJ had to say (emphasis mine):
“The Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding economic activity and prices including the effects of the consumption tax hike scheduled to take place in October 2019.”
In other words, the BOJ is saying that we shouldn’t expect a rate hike anytime soon.
Moreover, the BOJ also only slightly tweaked its forward guidance on its so-called “QQE With Yield Curve Control” to be more flexible by allowing 10-year JGB yields to “move upward and downward to some extent” before stepping in. However, the BOJ also stated that the target is still to keep 10-year JGB yields “at around zero percent.”
In short, the BOJ basically reinforced its dovish monetary policy stance, which likely disappointed rate hike junkies who were expecting some form of tightening, given the rumors that were flying about last week.
BOJ Shogun Kuroda later reinforced the BOJ’s dovish stance even further (while also hitting speculators) during his presser when he said that (emphasis mine):
“This is the first time we will introduce forward guidance on interest rates. We’ve adopted this to ensure market trust in our policy as we will be maintaining our massive stimulus longer than initially expected. There was some speculation in the market that the BOJ will seek an early exit from stimulus, or raise rates soon. With this guidance, we can dispel such speculation.”
Anyhow, the yen encountered more pain during the U.S. session, thanks to a Bloomberg report that claimed that “Representatives of U.S. Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He are having private conversations as they look for ways to reengage in negotiations.”
However, the Wall Street Journal released a report that claimed that there had been little progress in trade talks between the U.S. and China, adding that “Some [of Trump’s advisers] are pushing the president to apply tariffs as high as 25% on $200 billion of Chinese imports, up from an original proposal for 10%.”
A Bloomberg report was then released later on, which claimed that “The Trump administration will propose raising to 25 percent its planned tariffs on $200 billion in Chinese imports, ratcheting up pressure on Beijing to return to the negotiating table.”
And those negative trade-related rumors likely sent safe-haven flows towards the yen, allowing the yen to lick its wounds.
The damage caused by the BOJ really did a number on the yen, though. Even so, there’s still a chance for the yen to steal a win from a Aussie and close out the week as a net winner.