The dollar started the year with strong growth on many fronts, but not against the yen. The Japanese currency seems like a tough nut, so we see an active tug-of-war on the USD/JPY chart for the second straight session.
Last Tuesday was the best day for the US dollar since mid-December. Yesterday, the DXY index jumped over 0.8% against its major competitors and reached 104.49.
The dollar showed parabolic growth on almost all fronts, but paired with the yen, which now has a powerful trump card in the form of a possible pivot of the Bank of Japan, moved quite unevenly, up and down.
Some analysts believe the greenback's latest surge was less dictated by any fundamental factors, which is why the greenback failed to strengthen against the yen.
Most likely, traders, who came back to the market after the New Year holidays, hurriedly closed their short-term positions in USD in December.
"Let's be honest, the US dollar ended the year a bit overdone," - commented Geoffrey Yu, analyst of The Bank of New York Mellon.
For this reason, experts advise not to attach too much importance to the recent growth of the dollar and to focus as much as possible on the key triggers, which are expected this week and next week.
Today, markets will focus on the release of the minutes of the December FOMC meeting. Investors hope that the FOMC minutes will shed light on the central bank's further interest rate plans.
Recall that last month the US central bank slowed the pace of its monetary tightening, raising rates by only 50 bps.
At the same time, US officials stressed the need to maintain high rates for a longer period in order to finally suppress inflation in the country.
Most traders now expect the US rate to peak at 4.98% by June and fall back to current levels by the end of the year.
If today's report shows the central bank's indecisiveness on rates, it could significantly undermine hawkish market expectations and lead to a widespread drop in the dollar in the short term.
Analysts believe that more dovish rhetoric from the Fed could send the USD/JPY pair into another free-fall. Against this backdrop, the pair risks retesting the recent low at 129.51 or to fall even lower.
Recall that at the end of last year, the dollar-yen asset entered a bearish trend after the BOJ unexpectedly adjusted the policy for controlling long-term bond yields.
The measure was intended to improve the bond market, but traders perceived it as a hawkish move by the central bank.
Last Saturday, the yen got another strong driver for growth when the Nikkei news agency reported that the BOJ was going to revise its annual inflation forecast upward. This greatly increased market speculation that the central bank might capitulate.
This morning, BOJ Governor Haruhiko Kuroda tried to reassure traders that the central bank is still focused on keeping its soft monetary policy.
However, the market seems to have stopped listening to the words of the official, who has only a couple of months left in his position.
Traders ignored Kuroda's dovish comment, focusing instead on Japanese Prime Minister Fumio Kishida's surprise statement.
On Wednesday morning, the Nikkei Asian Review published a recent interview with the official in which he stressed that he was going to discuss with the next BOJ governor the issue of revising the price benchmark agreement.
That little remark, hinting at a possible change in Japanese monetary policy, provided substantial support to the JPY. At the time of writing, JPY had jumped 0.3% and thus erased all the recent gains of the greenback.
Forecast on the USD/JPY pairAnalysts at CIBC Capital Markets believe that today's release of the minutes of the December FOMC meeting is unlikely to cause strong volatility in the USD/JPY pair. Of much greater importance for the pair at this stage will be the upcoming U.S. employment and inflation data.
The traditional Nonfarm Payrolls report, which will show the dynamics of the number of private nonfarm payrolls in the country in December, will be published on Friday.
Economists expect the index to fall from 221,000 to 183,000. If the forecast comes true, it will hurt the dollar as negative data from the labor market may force the Fed to lower the degree of its aggressiveness regarding interest rates.
However, a key trigger for the USD/JPY pair which will determine its long-term direction will be the US consumer price growth report for December, which will be released next week, on January 12.
Currently, experts are predicting an increase in annual inflation in America from 7.1% to 7.3%. If we actually see an increase in inflationary pressures, it will confirm the view that the Fed will continue its aggressive policy, which is favorable for the dollar.
The greenback may still show growth against the yen, but its ascent is likely to be limited until the BOJ's next meeting, Rabobank analysts warned.
The BOJ members are scheduled to meet again on January 18. As X-day approaches, market tensions will rise.
"Given the changes made to the policy of controlling the yield curve in December, we believe that this month we will see a further adjustment of the YCC," noted in Rabobank.
If the BOJ takes such a step, it will leave no doubt that after Kuroda's departure the central bank will begin a gradual normalization of its monetary policy. Such a scenario is favorable for the yen.
Considering the positive fundamental background that is starting to take shape around the Japanese currency, analysts at Swiss bank Pictet are predicting a USD/JPY exchange rate of 125 by the end of the year, which implies a 4% strengthening of the JPY compared to the current levels.