Week Ahead: USDJPY to feel the love this Valentine’s Day?

Roses are red, violets are blue,

new BOJ boss and US CPI are due.

This Valentine’s Day, USDJPY is set to react to major clues on what’s next for the US and Japanese central banks respectively.

But today, there's already been a shocker!

The Yen is strengthening following local news report that Kazuo Ueda, the 71-year-old former BOJ board member, is set to be announced as the new BOJ chief! 

This underscores JPY's sensitivity to the imminent unveiling of the next Bank of Japan governor.

At the time of writing, the strengthening Yen is now forcing USDJPY to test its 21-day simple moving average (SMA) for support.

Hence, the official nomination of the next BOJ chief, along with the latest US inflation data, are set to grab the limelight amidst these key economic data releases and event due over the coming week:

Monday, February 13

• EUR: ECB Governing Council member Mario Centeno speech
• USD: Fed Governor Michelle Bowman speech

Tuesday, February 14

• AUD: Australia February consumer confidence
• JPY: New Bank of Japan Governor to be announced by Japanese PM; Japan 4Q GDP
• EUR: Eurozone 4Q GDP and employment data
• GBP: UK December unemployment, January jobless claims
• USD: US January CPI; speeches by Dallas Fed President Lorie Logan, New York Fed President John Williams, Richmond Fed President Tom Barkin
• US earnings: Coca-Cola, Airbnb, Marriott International

Wednesday, February 15

• GBP: UK January CPI
• EUR: Eurozone December industrial production
• USD: US January retail sales and industrial production

Thursday, February 16

• CNH: China January new home prices
• AUD: Australia January unemployment; February consumer inflation expectations
• USD: US weekly initial jobless claims

Friday, February 17

• AUD: RBA Governor Philip Lowe speech
• USD: Richmond Fed President Thomas Barkin speech

On Tuesday, February 14th, look out for ...

1) Japanese Prime Minister Fumio Kishida’s pick for the new Bank of Japan (BOJ) Governor.

This would be the first change at the top in a decade, with current Governor Haruhiko Kuroda having been in the role since March 2013, and due to step down in April 2023.

Recall that the BoJ has yet to hike its own interest rates, sticking out like a sore thumb among other G10 central bankers who had been aggressively raising rates throughout most of 2022.

In fact, the BoJ’s Policy Balance Rate has been stuck in negative territory (minus 0.10%) since 2016.

And it’s shaping up to be a battle between BOJ veterans, past and present: 

• A step-up from someone within the current administration signals a continuation of the existing dovish policy outlook.
   
• However, a new boss from outside the current administration, though having been a previous BOJ insider, would signal to markets that a new policy regime may soon be afoot.

READ MORE:

(January 4th, 203): JPY listed as one of 3 potential winners in 2023

(December 20th, 2022): Why is the Japanese Yen soaring?

(April 21st, 2022): Why is the Yen so weak?

2) January’s US inflation data: forecasted to moderate lower to 6.2%, compared to December’s 6.5% year-on-year advance.

If so, this would strengthen the idea that disinflation (slowing inflation) is truly taking hold in the world’s largest economy, with a 6.2% headline consumer price index (CPI) figure being significantly lower than June’s 9.1% figure.

Signs of moderating inflation should then in turn allow the US Federal Reserve a.k.a. the Fed to soon pause on its rate hikes, having already raised its benchmark rates by 450 basis points since Q1 2022.

Potential scenarios for USDJPY:

• USDJPY should climb if we see:

1) A higher-than-6.2% CPI number, which would suggest that US inflation isn’t cooling as fast as the Fed hopes

This would mean that the Fed has to keep hiking US rates past the market-forecasted 5.15% peak.

Note that the upper bound of the Fed’s benchmark rates now stands at 4.75% after the 25 basis point hike earlier this month.

Also note: more rate hikes = currency strength.
 

2) An incoming BOJ Governor that’s similarly dovish to Kuroda.

Look out for names like Masayoshi Amamiya (current deputy governor), who’s a frontrunner for the role, and Masazumi Wakatabe (also current deputy governor).

If markets are forced to unwind hopes of an imminent rates lift-off under the new BOJ Governor, that should translate into a further pullback for the Japanese Yen = immediate gains for USDJPY.

• USDJPY should fall if we see:

1) A lower-than-6.2% CPI number, which suggests that the Fed’s aggressive rate hikes last year are having the intended effect of slowing down US inflation.

This should enforce market predictions that the Fed can soon pause with its rate hikes, unwinding the US Dollar’s gains so far in February while allowing the Japanese Yen to be reassert itself.

Again, generally, higher interest rates tend to translate into currency strength, and vice versa.

2) A new BOJ Governor (not from within the current administration) who’s hawkish, meaning that this new central bank boss will be more inclined to lift Japan’s benchmark rates out of negative territory.

Judging by the Yen's surge today (Friday, Feb 10th), Ueda is initially seen as a hawk, not from the existing leadership and perhaps more open to policy change i.e. a rate hike.

Also, look out for names like Hiroshi Nakaso and Hirohide Yamaguchi, both of whom are former deputies to previous BOJ governors.

In other words, if the incoming governor is not part of the current leadership (or at least anyone BUT Amamiya), that would signal a shift in the BoJ’s policy stance, i.e. rate hike coming soon perhaps.

Yen bulls (those who believe that JPY will strengthen) will be eager to react to such prospects.

Key levels for USDJPY:

RESISTANCE

• 50-day simple moving average (SMA) = which has been thwarting USDJPY’s recent attempts to move higher
   
• 132.713 = 50% Fibonacci retracement level from USDJPY’s peak-to-trough ascent in 2022
   
• 133.62 – 134.77 = region surrounding psychologically-important 134.0 level, also having acted as support-turn-resistance in December-January period.

SUPPORT

• 21-day SMA = resistance turn support level
   
• 128.174 = 61.8% Fibonacci retracement level from USDJPY’s peak-to-trough ascent in 2022
   
• 127.224 = year-to-date low

According to Bloomberg's FX model, there's a 70% chance that USDJPY will trade within the 127.1 - 133.7 range over the next one week.