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Yen Caught Between Negative Interest Rates and Negative Growth -

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Feb, 22nd 18:03

ob-market-outlook

USDJPY Market Outlook

The yen has weakened against the dollar after the Japanese manufacturing sector showed a slight slip in January. It is reported that Flash Manufacturing PMI dropped from​​ 52.3 to an eight-month low at 50.2, still indicating expansion though modestly.​​ 

Currently, USDJPY is trading at 112.831 JPY, up 0.3% compared to the opening price.

The effect from BOJ’s adoption of negative rate policy has boosted the yen up against majors recently, including against the US Dollar. When the bank announced interest rate at minus 0.1% at its January meeting, the BOJ expressed determination to push their interest rates deeper into the negative territory “if judged as necessary”.

Hideo Hayakawa, a former BOJ chief economist, raised concerns about the “side-effects” on personal savings accounts if BOJ continues easing monetary policy through negative rates.

Also the prominent Japanese banker Takeshi Fujimaki assumed that BOJ may not dare to lower the rate enough to handle weak inflation, as it will lead to “expediting a fiscal collapse” through higher yield bonds. Japan stands on the top of highest mountains of public debt in the world, accounting for 226.1% of GDP, according to The IMF. Unable to expand the assets purchase program (due to the existing debt burden) and lower interest rates further, BOJ seems to be running out of tools to boost inflation and the economy.

The dollar index, which measures the value of the U.S. dollar relative to majority of its most significant trading partners, has rallied 0.3% since the beginning of the day. Tonight, U.S. January Manufacturing PMI is due at 2:45 p.m. GMT. The number is expected to retreat a little bit from 52.4 to 52.3, which in turn may drag the dollar down from the highs.

Fig USDJPY Daily Technical Chart

USDJPY failed to break through the Fibonacci 38.2 level on Feb 16 and dropped below 23.6 level. RSI is as low as 35.6 which suggests possible further depreciation. In the context of soft data from the U.S., the chances are that the pair may surge to retest the resistance at 113.534.

Trading suggestion:

Buy USDJPY Digital Put Options at 112.000 and Digital Call Options at 113.520.

 

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