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    US Dollar steadies with US yields back up after BoJ disappoints markets again

    Source Fxstreet
    January 23, 2024 12:30
    • The US Dollar is flat to a touch softer in the aftermath of the BoJ meeting.
    • Traders try to keep powder dry towards main events on Thursday and Friday. 
    • The US Dollar Index sees pressure building on 103 to break lower. 

    The US Dollar (USD) is flat again, though it keeps flirting with a break below the important 103-level in the US Dollar Index (DXY). Markets are having difficulties with the Bank of Japan (BoJ) rate decision this Tuesday. BoJ governor Kazuo Ueda has tested markets’ patience by not hiking, and postponing the long awaited exit out of negative rates. Markets are not reacting very well to the nerve game the BoJ is playing, with US yields jumping higher and equities flat to mildly negative. 

    On the economic front, some very light data lies ahead of Thursday and Friday. In the run-up to the US Gross Domestic Product (GDP) and rate decision from the European Central Bank (ECB) along with comments from ECB’s head Christine Lagarde on Thursday, traders are looking for some clues in the Redbook index and Richmond Fed Manufacturing Index for January. Certainly that last one might initiate some moves in the Greenback, seeing the recent poor performance of several Manufacturing Index numbers over the past few weeks. 

    Daily digest market movers: BoJ hits nerves

    • The Bank of Japan (BoJ) has kept its interest rates unchanged. Governor Kazuo Ueda said that easing will still take place even when negative interest rates end. There was no commitment on the timing of when the actual hike would happen. Markets are not reacting well on being left in the dark on the timing of the first rate hike. 
    • Holders of Belarusian EU bonds have sent a notice of default to Minsk, according to RBC.
    • Around 13:55 GMT the Redbook Index is due to be released. Previous was at 5%.
    • Near 15:00 the Richmond Fed Manufacturing Index for January is due to be released. Previous number was at -11 with -7 expected. Expect some market movements on the back of this number as several Manufacturing Indices have fallen into contraction and might be the first signal of a possible recession or downturn for the US economy. 
    • Around 16:30 the US Treasury will allocate a 52-week bill. 
    • A 2-year Note will be placed in the markets by the US Treasury near 18:00. 
    • Equity markets are not digesting the BoJ rate decision. Equities are looking for direction with most indices in the red by 0.50%. Only outlier is the Chinese Hang Seng, up over 2.6% after the Chinese government is set to issue further supportive measures for the Chinese stock markets. 
    • The CME Group’s FedWatch Tool shows that markets are pricing in a 97.4% possibility for an unchanged rate decision, with a slim 2.6% chance of a cut.
    • The benchmark 10-year US Treasury Note jumps back up to  4.13% after its decline on Monday to sub 4.10%.

    US Dollar Index Technical Analysis: Week kicks off

    The US Dollar Index (DXY) is not giving up that easily on its opportunity to possibly pop back up above the important resistance at the 200-day SImple Moving Average (SMA) near 103.48. Despite downside pressure with lower highs and lower lows, the DXY for now is not selling off as one would expect in these kinds of conditions. Expect the main rehearsal to come on Thursday with the ECB rate decision, ahead of the US Federal Reserve meeting next week. 

    There are some economic data points that could still build a case for the DXY to get through those two moving averages again and run away. Look for 104.44 as the first resistance level on the upside, in the form of the 100-day SMA. If that gets scattered as well, nothing will hold the DXY from heading to either 105.88 or 107.20, the high of September.  

    A bull trap looks to be underway, where US Dollar bulls were caught buying into the Greenback when it broke above both the 55-day and the 200-day SMA in last week's trading. Price action could decline substantially and force US Dollar bulls to sell their positions at a loss. This would see the DXY first drop to 102.60, at the ascending trend line from September. Once below it, the downturn is open towards 102.00.

    Bank of Japan FAQs

    What is the Bank of Japan?

    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%.

    What has been the Bank of Japan’s policy?

    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.

    How do Bank of Japan’s decisions influence the Japanese Yen?

    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.

    Is the Bank of Japan’s ultra-loose policy likely to change soon?

    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.

    Disclaimer: For information purposes only. Past performance is not indicative of future results.
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