USD/JPY Forecast: Market Eyes 10-Year JGB Auction for Yen Price Cues

How high can the USD/JPY go? Will there be strong demand for 10-year Japanese Government Bonds (JGBs) in the July 2 auction to stem the tide?

Japanese Government Bond Auction in Focus

A 10-year JGB Auction will attract investor attention on Tuesday, July 2. 10-year JGB auctions can influence Japanese Yen trends for several reasons, including:

• Interest rates: The yields set for the auction determine 10-year interest rates for Japanese government debt, impacting Yen strength relative to its peers.
• High demand: This could reflect confidence in the Japanese economy and fiscal position. The Yen may strengthen through foreign investment flows and increased demand for Yen-denominated assets.
• Monetary Policy Expectations: Higher-than-expected yields could suggest the markets expect a near-term BoJ rate hike or reduction in asset purchases.

Confidence in Bank of Japan Plans to Cut JGB Purchases Under the Spotlight

Significantly, the Bank of Japan announced it would detail its plans to cut JGB purchases in the July Monetary Policy Meeting. However, the BoJ remained on the fence about an interest rate hike.

Demand for 10-year JGBs in the auction may reflect how aggressively the markets think the BoJ will cut its monthly JGB purchases. Lower-than-expected yields would suggest the markets expect nominal cuts, which could exacerbate the Yen problem.

As the JGB auction approaches, investors may speculate about extreme scenarios. One question would be: Can the Japanese Yen reach 170 against the US dollar?

To put this in historical context, the USD/JPY last reached 170 in April 1986, trending lower from 250 levels in 1985 after the signing of the Plaza Accord. France, West Germany, the UK, Japan, and the US signed the Plaza Accord to depreciate the US dollar against the respective currencies.

Will the Japanese government intervene if yields in the JGB auction are lower than expected?

After the short-lived effects of the last intervention, the government may expect the BoJ to take steps to bolster the Yen. However, the next Bank of Japan monetary policy meeting is on July 30 and 31.

Could the BoJ hold an unscheduled meeting?

On Wednesday, June 26, Bruegel Senior Fellow Alicia Garcia Herrero shared her views on effective measures to bolster the Yen, saying,

“Bank of Japan to start quantitative tightening, which could support the Yen more than intervention.”

While the BoJ and Japanese government grapple with weakness in the Yen, investor attention will also turn to upcoming US economic data. The stats could affect buyer demand for the US dollar. Labor market stats will be the focal point, which could ease selling pressure on the Yen if there are signs of cooling.

Will the US JOLTs Job Openings Report Raise Bets on a September Fed Rate Cut?

Investors will eye the US JOLTs Job Openings Report with keen interest later in the session on Tuesday.

Economists forecast JOLTs to report job openings to fall from 8.059 million in April to 7.900 million in May.

A significant drop in openings could indicate a weakening labor market. This, in turn, might impact wage growth and disposable income, potentially dampening consumer spending and demand-driven inflation.

Economists also anticipate a slight dip in job quits from 3.507 million to 3.500 million. In uncertain job markets, workers tend to hold on to their current positions, leading to fewer quits.

For perspective, job openings have fallen for four consecutive months to April. May 2023 saw openings at 9.824 million.

While the JOLTs Report is significant, its impact may be amplified or limited for various reasons. Investors should consider whether to react to the numbers or wait for the critical US Jobs Report (Fri).

Beyond the labor market data, Fed Chair Powell is on the calendar to speak on Tuesday.

Will Powell react to the US Personal Income and Outlays Report or hold out until after the US Jobs Report?

Short-term Forecast: Bearish

USD/JPY trends depend on intervention threats, BoJ commentary, US labor market data, and Fed Chair Powell. Better-than-expected US job openings and silence from Japan could fuel buyer demand for the US dollar. Nevertheless, investors should be wary of an intervention or BoJ measures to bolster the Yen.

USD/JPY Price Action

Daily Chart

The USD/JPY held well above the 50-day and 200-day EMAs, affirming the bullish price signals.

A USD/JPY breakout from the July 1 high of 161.728 could give the bulls a run at the 162 handle.

The Japanese government, Bank of Japan, US job openings, and Fed Chair Powell will be in focus.

Conversely, a break below the 160 handle could bring the 50-day EMA into play. A fall through the 50-day EMA could signal a drop toward the $151.685 support level.

The 14-day RSI at 75.35 shows a USD/JPY in overbought territory. Selling pressure could intensify at the July 2 high of 161.728.