Long or Short USD JPY

Long or Short USD/JPY

Short USD/JPY: With both the US Federal Reserve and the Bank of Japan holding monetary policy meetings this week, the stakes are high for the USD/JPY currency pair. The Fed is not expected to make any changes to interest rates this week, as the central bank has generally become increasingly dovish since its rate hike in December, but will provide its current outlook on the common concerns of low inflation and economic growth risks. If the Fed’s message is one of increased dovishness in the face of these concerns, the dollar could continue to weaken as it has generally done for the past several months. As for the yen, reports recently surfaced that the Bank of Japan (BoJ) is considering potentially more aggressive easing actions in the form of additional stimulus measures. This would entail the implementation of negative lending rates to financial institutions in Japan. Though the yen immediately began to plummet as the market digested this information, it should be noted that a similar tumble for the Japanese currency occurred when the BoJ pushed interest rates into negative territory in late January. Immediately thereafter, however, the yen embarked on a period of major strengthening for the ensuing months. Therefore, the effectiveness of the BoJ’s easing tools and tactics has come into question. Even if the BoJ institutes additional stimulus measures, the yen could simply shrug it off once again and continue to strengthen. In this event of continued dovishness from the Fed and a yen that remains impervious to the BoJ’s attempts to weaken it, USD/JPY could continue to extend its recent medium-term downtrend.

Long USD/JPY: Despite any dovishness from the Fed, the US central bank continues to be comparatively among the most hawkish of major central banks. While further rate hikes in the US may be delayed for the time being, the generally-expected trajectory for US interest rates continues to be to the upside. This stands in sharp contrast with other major central banks, including the Bank of Japan, which continue to explore ways to ease monetary policy and implement further stimulus measures. In addition, the BoJ is determined to stem the rise of the yen, and is unlikely to give up on its quest to do so. Therefore, over a slightly longer-term horizon, the bias for USD/JPY should eventually turn back to the upside as the Fed potentially continues its tightening policy and the BoJ utilizes the tools at its disposal to weaken its currency.