By Ankur Banerjee
SINGAPORE, Jan 18 (Reuters) – The U.S. dollar steadied on Wednesday, while the yen slipped as investors eagerly awaited the Bank of Japan’s policy decision, which could set the stage for Tokyo to end its ultra-easy monetary policy.
The central bank stunned the market last month by raising its cap on the 10-year yield to 0.5% from 0.25%, doubling the band it would permit above or below its target of zero. Since then, speculation has swirled that the BOJ was likely to tweak its yield curve control (YCC) policy further.
The Japanese yen weakened 0.56% versus the greenback at 128.83 per dollar on Wednesday, easing off the seven month high of 127.25 it touched on Monday. The dollar index, which measures the safe-haven dollar against six peers, was flat at 102.400.
Kristina Clifton, a senior economist and senior currency strategist at Commonwealth Bank of Australia, said the meeting is likely to result in large volatility in currency markets, pointing out that a dovish stance could see dollar/yen surge by 2-5 yen.
“By contrast any policy tweak may again be interpreted by markets as a step towards policy normalisation, pulling dollar/yen lower, potentially sharply lower,” Clifton said.
The 10-year yield on Japanese government bond breached the BOJ’s ceiling for three straight sessions to Tuesday, leading to a wave of emergency bond buying by the government.
Some investors are betting the BOJ will be forced to adjust, or even dismantle, YCC as early as this week on the view the central bank cannot sustain the massive volume of bond buying needed to defend the cap.
“The pressure on the JGB market in recent weeks alongside the prospect of rising Japanese inflation leads us to conclude that the BOJ will deliver a strong signal that the end of YCC is nigh,” said National Australia Bank strategist Rodrigo Catril in Sydney.
“If the Bank keeps its YCC band unchanged, this is likely to come alongside the commitment of more JGB purchase but given market pressure we suspect that at a minimum the Bank will have to give a strong signal that a shift in policy is coming imminently.”
Meanwhile, sterling was last trading at $1.2274, down 0.11% on the day, while the euro was down 0.03% to $1.0785.
The Australian dollar fell 0.04% at $0.698, while the kiwi rose 0.03% versus the U.S. currency at $0.643.
(Reporting by Ankur Banerjee in Singapore; Editing by Sam Holmes)
