USD/JPY tumbles on BOJ “back-door” tapering and renewed US political jitters

• Yen strengthened on talk of BOJ “mini tapering”.
• USD is also under pressure on renewed political jitters out of Muller’s marathon investigation.

USD/JPY is now trading around 106.70, plunging 0.60% on BOJ´s “back-door” tapering and month-end flows from Japanese exporters that may be helping the Yen to some extent.

Apart from the BOJ “stealth” tapering the USD was also under pressure against the Yen after BOJ´s Governor Kuroda said that the BOJ won’t continue its current powerful monetary easing once inflation hits its 2% target in a stable manner, even if the government puts pressure on the central bank to keep interest rates low.

The market knows that BOJ is increasingly out of its “ammunition” amid a scarcity of eligible QQE bonds, everything being equal. Thus a gradual “stealth” tapering may be an eventuality for the BOJ in the coming months, while 3 rate hikes by Fed in 2018 have already been priced in to a large extent.

On Wednesday, USDJPY slumped in early Asian session after the BOJ cut its 25-40Y JGBs purchase by a 10 bln Yen. As a result of this “mini” tapering by BOJ, USDJPY tumbled from Tuesday’s Powell “shocker” high of around 107.67 despite the new Fed chair sounded more optimistic about inflation in his testimonial Q&A session than in the initial prepared statement.

The USD is also under stress on Wednesday NY session amid subdued US economic data. Although US GDP for Q4 flashed at 2.5% in line with the estimate and private consumption also ticked up, the vital inflation parameter for Fed (core PCE) came muted at 1.90% along with GDP price index at 2.3% that edged down from 2.4%. Also, Chicago PMI, Pending home sales all came subdued.

Bond traders are now pondering the potential of four rate hikes this year after Powell said that strengthening growth and inflation may spur policymakers to reconsider their projection of three hikes. Powell said that he has some confidence inflation is moving up to target. He also said he didn’t think exchange-traded funds (ETF) were to blame for the market correction earlier this month.

Powell also said that he doesn't see a problem with the current yield curve and ended his marathon speech by saying the US economy is in the best shape it’s been in a while and they are close to full employment.

Technically, USDJPY now has to sustain above the 107.75 zone for a further rally towards 108.05-108.30 and further sustaining above 108.30, it may race towards 108.75-109.20; otherwise, sustaining below the 107.50 zone, USDJPY may again fall towards 106.75/106.00-105.40 and 105.05-104.40 zones in the coming days.