The EUR/JPY cross extends its steep descent witnessed since the early part of this week and plummets to the lowest level since May 6, around the 165.40 region during the Asian session on Thursday.
Expectations that the Bank of Japan (BoJ) could hike interest rates again at its upcoming policy meeting next week force investors to continue unwinding bearish Japanese Yen (JPY) bets. Adding to this, the risk-off impulse – as depicted by the overnight slump in the US equities and a weaker tone across the Asian markets – further benefits the JPY's relative safe-haven status and drags the EUR/JPY cross lower for the fifth straight day.
Against the backdrop of persistent worries about a slowing Chinese economy, the disappointing release of the global flash PMIs on Wednesday tempered investors' appetite for perceived riskier assets. Meanwhile, the HCOB's preliminary survey indicated a broad-based weakening of economic conditions in the Eurozone, which reaffirms the European Central Bank's (ECB) downbeat view of the Eurozone's economic prospects.
Moreover, expectations that inflation in the Eurozone would keep falling keep the door for a September interest rate cut by the ECB wide open. This, in turn, undermines the shared currency and contributes to the heavily offered tone surrounding the EUR/JPY cross. Apart from this, the downfall could be attributed to technical selling following the previous day's breakdown through the 100-day Simple Moving Average (SMA).
That said, the Relative Strength Index (RSI) on the daily chart is already flashing slightly oversold conditions and warrants some caution for aggressive bearish traders. Hence, it will be prudent to wait for some near-term consolidation or a modest bounce before positioning for any further depreciating move heading into the key BoJ meeting. In the meantime, traders will take cues from the release of the German Ifo Business Climate on Thursday.
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.
The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.