EURJPY Exchange Rate Tests BOJ’s Resolve Ahead of Data

The EURJPY exchange rate has been at an all-time high since April, leading to a Bank of Japan intervention. 

EURJPY - Daily Chart

EURJPY – Daily Chart 

EURJPY is trading at 170.89 and looks set to test the all-time high 171.61, reached on 29 April. The BOJ intervened at that same level at the start of May. 

The euro has weakened against other global currencies since the European Central Bank cut interest rates at its last meeting. 

The central bank cut its benchmark interest rate to 3.75%, and markets will see another two rate cuts this year in September and December. A Reuters poll showed that a near-80% majority expected the ECB to raise the deposit rate to 3.25%. 

That was up from almost 66% in May and 50% in an April survey. While 11 expected just one more reduction this year, six predicted three additional cuts. 

ECB President Christine Lagarde repeated at the June press conference that the bank will “continue” to depend on economic data to guide policy decisions, despite the ECB having done everything but formally pre-announce the June cut well in advance. 

Monday has economic data from Germany and the IFO Business Climate data for June. The number tracks sentiment among business owners. It is released at 4 pm HKT and is expected to come in at 49.7, up from 49.3 last month. 

Traders will continue to consider the prospect of Bank of Japan intervention. In May, the BOJ intervened around the current level.

The Bank of Japan has still not committed to higher interest rates, warning of lower bank profits. 

“Financial institutions’ profitability has decreased sharply in the past 25 years,” with some regional lenders becoming vulnerable to stress, a BOJ report said. 

“If interest rates rise sharply in a short period of time, financial institutions could incur latent losses on their securities holdings,” which could lead to tightened lending. 

However, policymakers are talking of gradual rate tightening, which could be a verbal intervention to decrease the yen. 

Bank of Japan Deputy Governor Shinichi Uchida said on Friday that the central bank will “adjust the degree of monetary support” if data and prices align with the bank’s forecasts. 

“Japan’s economy is recovering moderately, although there are some weak signs,” Uchida said. 

At last week’s policy meeting, the central bank also announced a July plan to reduce its vast bond-buying program in the coming one to two years. Uchida said the BOJ’s bond tapering scale will be “significant,” which could be a tipping point for the yen price.

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