USD/JPY relative central bank policy is set to remain dominant - Scotiabank

Eric Theoret, Strategist at Scotiabank noted that Near-term domestic risk is set to remain elevated ahead of the BoJ decision. From a technical view, he points to a short-term bullish bias and no resistance ahead of the July high 107.49.

Key Quotes

“JPY is soft, down 0.2% from Friday’s close and underperforming all of the G10 currencies with the exception of EUR following the release of disappointing industrial production and retail sales data. Near-term domestic risk is set to remain elevated as we look to the BoJ policy decision (typically around 11pm ET).”

“Expectations have been downplayed as policymakers have sought to shift their communication strategy following a run of serial disappointment on a year-to-date basis. Rumors have focused on a potential softening in the forecast and the outlook for inflation. Relative central bank policy is set to remain dominant, however we note the recent 5bpt narrowing in the 2Y U.S.-Japan yield spread and the modest turn in risk reversals—suggesting a slight rise in the premium for protection against JPY strength. JPY remains vulnerable to knee-jerk gains in periods of risk aversion.”

“USDJPY short-term technicals: bullish—signals are bullish across a range of both trend and momentum indicators, however the magnitude has softened. We highlight the absence of resistance ahead of the July high 107.49 and note the emergence of near-term support around the 9 day MA (104.34).”