The Japanese currency suspended the upward movement, which was not too intense, in anticipation of the decision to soften the monetary policy of the leading regulators - the Federal Reserve and the Bank of Japan. The decline was small, but noticeable, analysts said.
On Monday, October 28, the yen was trading in a narrow range of 108.67–108.72 after falling to its lowest level in the past week. Experts believe that the Fed's super soft position and a possible decision by the Bank of Japan to mitigate monetary policy have become the main drivers of this decline. This halted the growth of the USD/JPY pair, which climbed less than 0.1% to 108.74. Later, the pair reached the level of 108.79, which was the highest since October 17 this year.
Investors were very enthusiastic about the possible Fed rate cut this week. Usually, a reduction in rates is preceded by a weakening of the currency, but yesterday the USD/JPY pair reached a seven-week high, exceeding 109.00.
Earlier, the Federal Reserve announced the start of the purchase of treasury bonds at $60 billion per month to restore reserves. Experts consider this news favorable for the Japanese currency. However, analysts expect the USD/JPY pair to retreat before the announcement of the Fed decision on monetary policy. They believe that the yen will give up its positions, and the 200-day moving average, located near 109.00, will become a barrier to the Japanese currency's further growth. At the moment, the USD/JPY pair runs in the range of 108.91-108.92, having slightly risen from the low morning levels.
On the morning of Tuesday, October 29, the pair dropped to the levels of 108.85–108.86, but subsequently managed to gain a foothold in the gained positions.
Comparing the volatility of interest rates in the US and the volatility in the USD/JPY pair, the currency strategists of Citigroup Bank note that the US currency is the winner in this situation. The difference in interest rates will decrease if the Fed rates fall to zero, but this will not affect the volatility of the dollar, analysts said.
The USD/JPY pair is quite sensitive to the differential of long-term rates, experts emphasize. An important role for the Japanese currency exchange rate is played by the current monetary policy, the instruments of which, in addition to the Fed rate, include a quantitative easing program (QE) and fiscal stimulus. These factors strongly affect the US dollar. As for the actions of the Bank of Japan, it has practically nothing to strive for, analysts said. They do not expect drastic decisions from the regulator at today's meeting. However, the current situation is extremely unfavorable for the yen, experts emphasize. At the same time, they doubt the further weakening of the Japanese currency, which always remains stable in difficult situations.
The material has been provided by InstaForex Company - www.instaforex.com