USD/JPY extends drop as focus turns to FOMC and BoJ

It remains to be seen whether the down move is the start of something big for this pair or another mid-range, static noise.

The USD/JPY has sold off at the start of this as the US dollar resumed lower after staging a mild two-week rebound.  In a sharp contrast to other majors, the USD/JPY has been fairly stable throughout the post-lockdown period. Meanwhile, we have seen big moves for the likes of the EUR/USD and the AUD/USD, as well as gold and silver. But could the USD/JPY be the next USD/XXX to break down?

In the short-term, a lot will now depend on Wednesday’s FOMC meeting and the Fed’s message to the markets, while the longer-term direction of the yen will be determined by any significant changes to Abenomics under the new Japanese premier, Yoshihide Suga.

The Fed is undoubtedly going to maintain a dovish stance after it decided to shift to inflation targeting, suggesting a temporary rise in price levels will be tolerated in the future. The US central bank will be wary of uncertainty the US presidential election will bring with and wouldn’t want to cause unnecessary turmoil in the financial markets. Likewise, the BoJ will be cautious given that the pandemic is still a major issue for the global economy, on which the export-oriented Japanese economy relies heavily on. But insofar as the USD/JPY is concerned, the Fed’s message will likely provide a more meaningful direction to this pair rather than the BoJ, with the latter expected to just re-iterate that it will do more if needed.

USD/JPY breaks support…

…First of many to come?

Source: and ThinkMarkets
Monday’s sell-off saw the UJ take out a short-term bullish trend and former support around 105.80. What the bears need to see next is a breakdown beneath liquidity below the most recent low at 105.20, where we have the support trendline of the 2020’s triangle come into play circa 105 handle. If this level breaks, then watch out below for it could pave the way for further technical selling in the days and possibly weeks to come.

However, if the USD/JPY breaks above the 106.50-107.00 resistance range on a daily closing basis first, then this would most likely mark the end of any short-term bearish bias.
Will new PM give economy some Suga?

On Monday, the ruling Liberal Democratic Party (LDP) chose Yoshihide Suga to succeed the ailing Shinzo Abe who resigned last week. He will most likely take office after mid-week having been officially selected by the Diet. The 71 old Suga is the current chief cabinet secretary and is expected to continue the policies of Abe. Hence, Japan is likely to see the continuation of “Abenomics”, the name sake economic project of Shinzo Abe.

Abenomics, involving hyper-easy monetary policy, fiscal stimulus and structural reforms helped see the longest winning streak for the Nikkei since the late 80s.

Abe was quite successful in bringing about the easy monetary policy and the fiscal stimulus, however he failed to bring significant structural reforms to Japan’s corporations. As a result, Japan has seen an increase in jobs but not in wages.

After the pandemic hit, Japan saw a record economic decline of 27.8% between April and June and the government announced a $1 trillion stimulus package in response. In a post pandemic world, it is unclear what exact steps the new Suga administration will take to manage the long-term fallout from the economic downturn. We do know, however, that Mr Suga has promised to raise the minimum wage, promote agricultural reforms, and boost tourism. But will this be enough to support the economic recovery remains to be seen.