It's all about the BOJ so far today and we're seeing some modest moves in reaction as the Japanese yen runs lower. That despite the fact that the central bank delivered a 25 bps rate hike to bring its short-term policy rate to 0.75% - its highest since 1995.
So, what gives?
After dropping in the first half of the week, the pair is seeing a solid rebound. That helped by a double-bottom bounce off the early December lows just below the 155.00 mark. However, the run higher from 155.80 to 156.80 levels now owes very much to the BOJ.
The Japanese central bank might have raised interest rates but this seems to be more of a buy the rumour, sell the fact reaction. Now, BOJ governor Ueda was not explicit in pushing another rate hike in March. However, he did leave the door open for that as you would expect him to.
So, to say that Ueda was more dovish would be misplaced as I think he pretty much played things out as how he was supposed to and what you would expect him to given the tedious position between the BOJ and the incumbent government.
If so, why did the Japanese yen fall in this case?
I would say it's markets just taking all bets off for the time being and resetting on what to expect of the BOJ moving forward. The thing about the rate hike today is that it is one that the BOJ could just barely get away with.
The threshold and trigger point for the next rate hike will be very, very much higher. And it will definitely need very strong convincing from the upcoming spring wage negotiations. So unless that delivers a compelling argument for the BOJ to move again, policymakers might be stuck on the sidelines for a prolonged period.
Going back to USD/JPY, the pair now nudges closer to the December highs of 156.90-95 and that will be a key resistance point to watch out for. A break above that will pave the way for another extension to the rebound towards the November high of 157.89 potentially.
Just be wary that the big move we're seeing today, which is the largest gain in the pair since 19 November, is coming at a time just before the Christmas and New Year holiday period for markets.
As such, I wouldn't advise chasing such a move as thin liquidity conditions may exacerbate volatility in markets in the next two weeks. And that means allowing room for market moves that might or might not make too much sense.
