JPY Settles After Rally in Early Monday Trading

Published on: 07/26/18 2:29 PM

Category: Uncategorised

After a significant rally in early trading on reports of new monetary policy initiatives from the Bank of Japan, the JPY began to pare back some of its gains on Monday. During the rally, the yen gained nearly 0.5 percent against both the euro and the dollar, rising to 130.70 and 110.90 against the two currencies, respectively.

Monday’s early rally was based on speculation that the Bank of Japan could abandon its long-term position of loose monetary policy in an upcoming policy meeting that will be held on July 30th and 31st. Since 2016, the Bank of Japan has implemented negative interest rates and large stock purchases in what has been a largely unsuccessful effort to spur inflation and economic growth. Discussions ahead of the meeting have been considerably more active than usual, spurring expectations that the central bank roll back some of these policies, thus increasing bond yields and strengthening the yen.

The gains in the yen were also supported by US President Donald Trump’s recent comments criticizing the Federal Reserve for pursuing tighter monetary policy and thereby pushing up the value of the USD. Uncertainty over the future policies of the Federal Reserve in light of the president’s criticism prompted a selloff of the USD, pushing the JPY higher against it.

Expectations of altered monetary policy and decreased confidence in the dollar, however, were not enough to sustain Monday’s early rally. By afternoon in local trading time, the majority of the gains seen during morning trading had been erased. The fall was likely a correction for a rally based largely on speculation, as there is not yet any concrete information regarding what actions the Bank of Japan may take in its upcoming policy meeting. If the decisions made at that meeting favor a stronger yen, however, prices could move higher once again.

Japan’s current economic conditions also exert a generally downward pressure on the value of the JPY. Businesses in the island nation are struggling achieve profit growth, a fact which contributes to the anemic inflation rates of the past several years. Meanwhile, a rapidly aging population combined with a generous social welfare system has placed high costs on Japanese taxpayers while at the same time limiting available labor supply.

More broadly, Forex markets on Monday exhibited little overall movement. A more bearish outlook on the USD appears to be building in light of President Trump’s comments on interest rates. It is not yet clear to what degree those comments will translate into active policies from the Federal Reserve.