USD/JPY: Dollar plunged on talks of Kuroda reappointment at BOJ and probable change in policy guidance

• USD plunged on talk of the Bank of Japan backdoor tapering.
• USD is also under pressure on concerns about the US fiscal discipline.

USD/JPY is trading down 0.85% at around 107.65 during the morning trading session in Europe,  amid renewed risk-aversion move and the likelihood current Bank of Japan (BOJ) governor Kuroda winning the reappointment for the second term. The Japanese stock market index Nikkei-225 closed down 0.65%, erasing all the early gains of 1.3% on Tuesday. 

The market is concerned that mere reappointment of Kuroda does not mean the same old BOJ, addicted to endless QQE. Eventually, the BOJ has to normalize its ultra-accommodative monetary policy in line with increasing global tunes of QT (quantitative tightening) and thus Kuroda may be the best person in BOJ now to guide the market in an orderly manner for any change in policy guidance.

As par some reports, BOJ may get a more hawkish Deputy Governor this time to “assist” Kuroda in such difficult QT times. There is also talk of a “stealth or back door tapering” by BOJ as it may target YCC control for the 5YRJGB rather than 10YJGB at present, which will allow longer-term interest rate in Japan to rise without reducing its QE size.

The market is also concerned about US fiscal slippages

Earlier USD/JPY was range bound on the concern of US fiscal discipline after Trump’s infrastructure spending narrative. Despite significant bounce back of US stock market (SPX-500) from the Friday’s inverse-VIX panic low of 2530 to 2671; i.e. over 5.50% in the last two trading days, USDJPY was basically muted.

One of the primary reasons behind such muted response to the renewed “risk-on” US stock market trade may be that market is not convinced about the equity bounce because it was not accompanied by fall in the US bond yields, which continue to hover around 2.85% (10Y) after making a high of above 2.90% on Monday. Similarly, US30YTSY is hovering around 3.14% after making a high of almost 3.20% on Monday as the bond market is worried about US fiscal slippages.

Technical View

Technically, USD/JPY now has to sustain above 108.00 price area. Otherwise, 107.30-106.10 and 105.65-105.40 price zone may be visible soon.