BOJ Dovish Decision Trims Losses on EURJPY, Yield Differential Favours Bears

On Tuesday, investors eye the BOJ (Bank of Japan)’s decision, which trimmed the EURJPY losses, while yield differential favours bears. The Yen incurred minor losses on downward inflation forecast and easing calls.

BOJ Decision

A minor sell-off of the yen following BOJ decision helped trim losses on the EURJPY, although this relief is likely to be short-lived as the 10-year German-Japan yield differential supports a bearish move.

The pair started the morning around 131.59 and seems to be approaching slowly 131.67, hitting a low around 131.59.

The yen loses a few pips as the BOJ took notice of the weaker than expected inflation and board member Kataoka pointed out the need of more easing should there be delays in reaching the price target.

The Bank of Japan’s dovish decision strengthens the yen as the carry currency. However, the reaction seems to be rather apathetic, which may be because the 10-year yield differential dipped to 29.7 basis points, hitting its lowest level since 17 October.

Yield Differential

The spread is likely to narrow sharply in EUR-negative manner if the 0.285 September 7 low is breached.

Technical Outlook

A break above 131.81 (session high) would potentially expose EURJPY to 132.03 (50-DMA), above which the pair is likely to face major resistance around 132.51 (5-DMA). Breaking through the support line at 131.50 (Monday’s lows) could lead to a JPY sell-off to 131.00 (zero levels) and 130.60 (September 15 low).

Overall, analysts expect that the Bank of Japan maintain the monetary policy status quo. There is quite likely that the board stick to its set target for short rate and 10-year yield, at -0.1% and around 0.0%, respectively. The BOJ is also expected to maintain its guidelines for risk asset purchases, including its around ¥6tn/year ETF target. The recent strengthening of the Japanese equities perceived the BOJ’s ETF purchases as sharply slowing down in October.