Japanese Yen: Yen vulnerable after BoJ communication – MUFG
MUFG’s Derek Halpenny notes that the Bank of Japan’s 25bp hike to 1.25% fell short of hawkish market pricing, triggering an initial Yen sell-off as expectations for larger moves proved overdone.
Japanese Yen faces vulnerability following Bank of Japan's communication, as noted by MUFG. The central bank's 25 basis points hike to 1.25% did not meet hawkish market expectations, resulting in an initial sell-off of the Yen. The BoJ's language on real rates shifted from "negative" to "low," with guidance still pointing to accommodative conditions and further gradual tightening.
MUFG suggests a potential short-term rise in USD/JPY if Dollar sentiment remains favorable. The BoJ removed the description of real interest rates as "negative, mainly in the short-to-medium term zone" and replaced it with "remained at low levels, mainly in the short-to-medium term zone." This acknowledgment aligns with the recent surge in front-end rates, as the 2-year JGB yield has increased by 35 basis points since the last BoJ meeting.
Inflation remains below the 2.0% target, making the "low" description more suitable. The Bank of Japan reaffirmed its view that "accommodative financial conditions are expected to be maintained," indicating the possibility of an altered pace of tightening in the future. This shift may contribute to some short-term giveback from the Yen's recent strength.
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