21.12.201800:36 Forex Analysis & Reviews: USD/JPY: traders are nervous, the yen is growing

Today, during the Asian session, the last meeting of the Bank of Japan was held this year, which remained in the shadow of American events. Nevertheless, traders of the USD/JPY pair probably tracked the rhetoric of the head of the Japanese regulator Haruhiko Kuroda, who once presented a surprise in the form of an unexpected reduction in interest rates in the negative area.

However, this time there were no surprises. The December meeting was "passing", with a predictable result. The regulator expectedly retained all the parameters of monetary policy in the same form: the rate remained at the level of -0.1%, the volume of asset purchases remained the same, as the target of yield on 10-year bonds (0%). More lively interest was caused by the press conference of the head of the Japanese central bank. With a general "dovish" attitude, Haruhiko Kuroda voiced several rather optimistic theses. In particular, he said that the main economic foundation of the country remains stable, and the deflationary mood is completely overcome. Kuroda acknowledged that wage growth remains very weak, although the demand for labor continues to grow. Nevertheless, the regulator is still optimistic here - according to the head of the central bank, an upward price dynamics has been fixed in the country, so target levels will be reached, but "after some time".

In order not to overdo the "hawkish" notes, Kuroda once again warned that if the momentum of price growth weakened, the regulator would resort to measures of additional easing of monetary policy. He even indicated the list of available levers of influence - this is a reduction in interest rates (both short-term and long-term), an increase in the volume of asset purchases, as well as an expansion of the monetary base.

In general, such threats are voiced almost at every meeting - the market has already acquired "immunity" to such statements and practically does not react to them. Moreover, the annual core inflation in Japan is still marking time - the consumer price index excluding fresh food in October rose by 1%, repeating a similar increase in September. Overall, CPI rose 1.4% year on year (1.2% in September). The structure of the indicator suggests that the indicator has grown stronger than forecasts due to an increase in the cost of vegetables and grain crops, which, in turn, have risen in price due to summer weather disasters.

In other words, inflation, although well below the target level, demonstrates situational growth. This allows the Bank of Japan to resort only to verbal interventions, while maintaining the parameters of monetary policy in its previous form. But here it is worth emphasizing that if the main inflation indicators move down, the Japanese regulator can really realize its threats, and without unnecessary warnings - remember January 2016, when the regulator unexpectedly introduced negative interest rates on deposit accounts. The yen then impulsively collapsed throughout the market (paired with the dollar - by more than 2%), since literally two weeks before the meeting, Kuroda publicly excluded such a scenario.

Today, the situation is reversed: the yen appreciably strengthens, having updated several-month lows paired with the dollar: the last time the USD/JPY pair was in the middle of the 111th figure in the fall (in October and September), and then within a impulsive decline. Now the southern dynamics is also of an impulsive nature, but the technical picture makes it possible to count on a further price reduction - up from 110.40 (the lower limit of the Bollinger Bands indicator on the weekly chart).

It should be immediately noted that today's appreciation of the yen is not due to the outcome of the December meeting of the Bank of Japan. This factor has played its role, but by no means paramount. The Japanese currency is in demand because of anti-risk sentiment.

The position of the Fed, announced yesterday, forced traders to reconsider their decisions, after which interest in the safe haven instruments increased in many ways - in addition to the yen, gold, which has already reached July highs, is growing. Dollar bulls are disappointed by the fact that the Fed in 2019 will only double the rate, after which it is more likely to pause the process of tightening monetary policy.

And although such a scenario has long been discussed, its implementation still put pressure on the dollar. And not only on the dollar: the yield on 10-year-old treasuries fell to 2.77% - this is the lowest level since April of this year. The market is clearly nervous, especially since the growth of the US economy next year is likely to slow down: the Fed officials, numerous experts, and leading indicators are talking about this. Inflation also reminds of itself in a negative context: the last release surprised even Jerome Powell, who at a press conference declared an "unpleasant surprise" from inflation indicators.

All this suggests that the USD/JPY pair has the potential for its further decline. The first target of the downward movement is 111.00. If the pair enters the 110th figure, then the next support level will be 110.40 (the bottom line of the Bollinger Bands on W1).