The other side of the pair
USDJPY is undeniably one of the most important currency pairs in the FX market. It plays its role as a significant barometer for market sentiment globally as well as regional risk. USDJPY has the second highest traded volume on average in the market behind EURUSD. For almost a decade the currency pair hasn’t had to take too much notice of economic data affecting its JPY side. Instead, volumes and prices were driven predominantly by market sentiment and economic developments in the US and globally.
The reason USDJPY had become so desensitised to economic developments in Japan was because of the belief that the Bank of Japan was so committed to hyper-accommodative monetary policy that it didn’t matter what changes were taking place in the economy. With yield differentials being a key driver within any currency pair, the only variation in rate expectations was coming from the US side. Now that the BoJ seems to have abandoned its accommodative at all cost monetary policy persuasion, this dynamic is changing in USDJPY.
Last year the BoJ announced its first rate hike in over 17 years. Since that adjustment a further two hikes has taken place leaving benchmark rates at 0.5%. Today Japan will observe retail sales and industrial production data. With markets sensitive to any further rate adjustments in Japan, such data will prove to be market sensitive. The next BoJ meeting is due to be held in the middle of March with current market pricing indicating a high likelihood of a further upward adjustment to rates.
Discussion and Analysis by Charles Porter
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