Week Ahead: USDJPY set for wild Wednesday

The Japanese Yen has been the best-performing G10 currency versus the US dollar since end-October.

And there’s certainly been a lot of interest for JPY late, considering how our Dec 20th report was FXTM’s most-read article for all of 2022 (“Why is the Japanese Yen soaring?”).

The Japanese Yen could be set for more near-term gains ...

as the Bank of Japan holds its policy meeting amidst these other economic data releases and events in the days ahead:

Monday, January 16

• AUD: Australia December inflation gauge
• World Economic Forum begins in Davos – attended by central bank heads, finance ministers, and global business leaders
• US markets closed

Tuesday, January 17

• AUD: Australia January consumer confidence
• CNH: China 4Q GDP; December industrial production, retail sales, jobless rate
• EUR: Germany January ZEW survey
• GBP: UK November unemployment rate, December jobless claims
• CAD: Canada December inflation
• USD: New York Fed President John Williams speech
• S&P 500: Q4 earnings by Goldman Sachs, Morgan Stanley, United Airlines

Wednesday, January 18

• JPY: Bank of Japan rate decision
• EUR: Eurozone December CPI (final)
• GBP: UK December CPI
• USD: US December retail sales, industrial production, Fed Beige Book
• USD: Fed Speak – speeches by Atlanta Fed President Raphael Bostic, Dallas Fed President Lorie Logan, Philadelphia Fed President Patrick Harker

Thursday, January 19

• JPY: Japan December external trade
• AUD: Australia January consumer inflation expectations; December unemployment
• NOK: Central Bank of Norway’s rate decision
• EUR: ECB publishes December meeting minutes; ECB President Christine Lagarde speaks at Davos
• USD: US weekly initial jobless claims; Fed Speak – speeches by Boston Fed President Susan Collins, New York Fed President John Williams

Friday, January 20

• JPY: Japan December CPI
• CNH: China loan prime rates
• EUR: Germany December PPI
• GBP: UK December retail sales

USDJPY has been dropping on expectations for an eventual BoJ rate hike.

To be clear, markets are only forecasting a mere 38% chance that we could see a Bank of Japan rate hike on Wednesday, January 18th.

But recall that markets are forward-looking in nature; today’s prices reflect tomorrow’s expectations.

And markets currently fully expect the BoJ to finally see a rate liftoff in April, under the helm of the central bank’s new incoming governor.

If so, Japan can finally exit its negative interest rates regime, having kept its benchmark rate at negative 0.1% since 2016.

Also, here’s a recap of recent events that have spurred the surge for the Japanese Yen:

• December 20: BoJ policy shocker
  The BoJ unexpectedly allowed Japanese 10-year yields to reach a limit of 0.50% - which is double the prior ceiling of 0.25%.
   
• January 12: Yomiuru report
  The Japanese national newspaper claimed that BoJ officials will, over the coming week, “review the side-effects” of its ultra-loose policy stance.
   
• January 13: Yields cap breached
  Recall the new 0.5% cap for Japan’s 10-year yields? That level was breached today, forcing the Bank of Japan to make unscheduled bond purchases to try and reinforce the cap (more bond buying, lower yields)

These events have prompted markets to believe that more policy tightening is on the cards for 2023.

And such hopes have translated into JPY gains.

Week Ahead: Potential scenarios for USDJPY

With all that in mind ...

• if current BoJ Governor Haruhiko Kuroda pushes back against the market’s expectations for a rate hike this year, that may prompt the Japanese Yen to unwind some of its recent gains and potentially pull USDJPY back above the psychologically-important 130 mark.
   
• On the other hand, should markets detect the slightest of hawkish hints (BoJ is getting closer to a rate hike) out of Governor Kuroda next week, that should move USDJPY closer towards 126.0 and potentially test the lower downtrend line that began in November.
  
  And if the Yomiuru report proves true, AND the BoJ's review does show that side-effects of its ultra-loose policy settings are proving harder to contain, suggesting a faster-than-expected exit from negative interest rates, that may translate into further JPY gains as well.

At the time of writing, market forecasts are currently giving a slight edge that we'll see USDJPY back at 130 over the next one-week period, with such odds being placed at 70%, compared to the 65% chance that we'll see USDJPY touch 127.0.

READ MORE: 3 potential winners in 2023

But wait, there’s more!

Also look out for these other two potential catalysts that could move USDJPY over the coming week:

• January 20: Japan inflation data

Japan’s national consumer price index (CPI) – which measures headline inflation – is forecasted to come in at 4%.

If so, that would be the fastest inflation since January 1991!

Rising inflationary pressures might prompt the BoJ to follow in the footsteps of its major central banking peers who have been aggressively hiking their own interest rates last year in a bid to quell red-hot inflation.

Hence, a higher-than-expected CPI out of Japan next week may reinforce bets for a BoJ rate hike in 2023, likely translating into further gains for the Japanese Yen.
 

• Fed Speak in the coming week

The USD side of USDJPY could be moved by any policy clues contained within scheduled speeches by officials of the US central bank – the Federal Reserve a.k.a. the Fed.

Markets expect the Fed to hike by just 25 basis points at its next policy decision due on February 1st, which is a far cry from the supersized 75-bps hikes that we saw four times last year.

It'll be interesting to get these Fed officials’ takes on the slowdown in the US headline CPI that we just received yesterday (6.5% CPI for December; much lower than June’s 9.1%).

If these Fed officials fuel expectations that the slowdown in US inflation in turn allows the Fed to ease up on its rate hikes, that could translate into more Dollar weakness and further declines for USDJPY.

After all, the US dollar has been weakening since late September on the notion that the worst of the Fed rate hikes are now behind us.