On Tuesday, BoJ Governor Kuroda announced that there would be a slight tweak in bond yield control which would allow interest rates to rise more as they loosened their grip on low rates, which they had stuck by in their ultra-dovish policy. This meant that the yields could go as high as 50 basis points from 25 basis points which in essence would double the long-term interest rate if the limit was reached.
This was a surprise move and totally unexpected by the market. It is a clear step away from dovish policy even though the BoJ stated that this was in no way a form of monetary tightening. The market, however, rejected this narrative with massive gains in the Yen against the Dollar.
The timing of this move was extremely calculated as it was during a period of low volume and volatility due to the holiday season. The BoJ did this in order to avoid any massive shocks to the market which could cause cascading effects throughout the bond market. This was a lesson they may have learned from the Band of England as their pivot sent GBP crashing down.
The Bank of Japan also countered this effective monetary tightening move with an increase in bond purchasing, which is a form of easing, to balance the directional flows within market participants.
Moving forward, Japan is the largest holder of US treasury bonds with over $1 trillion of US debt. They began to offload their holdings during the past several months and we can expect this to continue into 2023. This recent move will encourage holders to sell treasuries which in turn lowers the value of bonds (as there is more supply) and results in rising bond yields.
It is still to be determined how this will affect the rest of the market but we may see the Dollar fall even more in the end as the Fed is also taking steps to move away from hawkish policy. Coupled with the hawkish nature of this move from the BoJ, analysts are predicting the Dollar to run out of steam and the bull run has now come to an end.
Gold should strengthen going into early 2023 on the back of this revelation not only as a safe haven against uncertainty but as a solid investment as we move away from risk off to risk on assets.
Bitcoin will act inverse against the falling Dollar and gain throughout the crypto market. We should see $20,000 reached if the Dollar weakness continues to prevail.
In today’s DIFX Analytics, we’re going to look into the following assets:
Dollar weakness post BoJ surprise pivot
The Dollar fell after the news from the BoJ. As the BoJ widened the yield curve to 50 basis points this in effect saw interest rates for long-term bonds almost double.
This caused a selloff in Japanese and US bonds and resulted in massive gains in Yen and losses to the Dollar Index.
Usually, rising yields result in rising currency but in this scenario, even as the US 10-year yields rose the Dollar fell against major currencies. This move might hinder the chance of a reversal in the greenback as Japan holds over 1 trillion of US debt and may begin to offload it.
Yen gains against the Dollar as BoJ steps in
The BoJ widened the yield curve in a shock move on Tuesday. This causes major gains in the Yen against the Dollar as we saw USDJPY fall from $137 down to $130.6 levels. This was the largest gain for the Yen in 24 years as it rose 4% against the Dollar.
The BoJ has had a strictly dovish policy for years and kept interest rates near 0 through covid and the recent economic turmoil. They are the last central bank to make a step toward some sort of monetary tightening. This caused Japanese and US bond yields to rise as bonds were sold off.
Bitcoin consolidates on BoJ shift
Bitcoin has stagnated in any directional movies since the news out of the BoJ. This can be due to mixed signals being sent as the Dollar was heading for a reversal but was stopped in its tracks by this sudden shift from the BoJ.
We have seen consolidated sideways moves since the news hit the media. As the Dollar fell, we did not see much action in the digital asset. Today the markets should digest the news and react accordingly.
Gold initial short signals
Gold gained on yesterday’s news of the BoJ loosening its grip on low rates. This was a shock to the market and investors have had to digest this news and what it means moving forward.
We see safe haven assets rise in times of uncertainty. The Dollar has been the safe haven trade for 2022 but as this directly affects the value of the Dollar, the market turned to Gold to store value while analysts project the next move forward.
We are still seeing the metal trade within range and no breakout has been seen as of yet.
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