Last week the Japanese Yen fell to an over seven-year low against the US Dollar, with the USD/JPY currency pair moving between highs of 122.02 and lows of 120.92.
Downward pressure on the Yen came in the form of concerns that the Japanese central bank will have to maintain its aggressive fiscal policy in order to support domestic growth and keep inflation moving toward target.
US Dollar bullishness was also inspired by positive US ecostats and speculation surrounding the upcoming Federal Open Market Committee (FOMC) gathering.
The Yen is likely to experience notable volatility on Tuesday as the Bank of Japan (BOJ) issues its interest rate decision. Hints that further easing may be on the way would be Yen-negative.
Also due for publication on Tuesday is Japan’s Final Coincident Index and Leading Composite Index for January, plus domestic trade balance figures for February.
As the week progresses additonal Yen movement could be occasioned by the BOJ’s monthly report, Reuters Tankan Index, the nation’s All Industry Activity Index for January and the minutes from Tuesday’s BOJ policy meeting.
Of course, the direction taken by the USD/JPY pairing will also be dictated by US news, and given what’s ahead there’s every chance the Japanese asset could tumble to a fresh low by mid-week.
Monday’s US Industrial Production/Manufacturing Production figures may lend the ‘Greenback’ support if they show solid output, but investors will largely be looking ahead to Wednesday and the Federal Open Market Committee’s latest policy statement.
The central bank is expected to leave policy unaltered, but may adjust its rhetoric with regards to the timeline for raising interest rates.
If the FOMC acts in accordance with the expectations of some economists and ditches the word ‘patience’ from its spiel, it will up the odds of a US rate hike occurring in the next couple of months and may drive the US Dollar to new highs against a number of its peers.
According to industry expert Marc Chandler, removing the word patience ‘represents an evolution in the Fed’s strategy to normalise monetary policy. They have reduced the time of their forward guidance from around six months (considerable period) to two meetings (patience). [Fed Chairwoman] Yellen more or less executed the strategy that [Yellen’s predecessor] Bernanke outlined for tapering. Shifting away from the date-dependent approach to the data-dependent approach is under Yellen’s leadership.’
However, if the Fed should disappoint these expectations and make no adjustments to its language, the US Dollar may fall from its pedestal and lose ground against peers like the Yen.
Other US reports to be aware of this week include the nation’s Initial Jobless/Continuing Claims figures and the Philadelphia Fed index.