In a surprise move, the Bank of Japan widened its 10y JGB Yield Curve Control (YCC) Band to +/- 0.5% from +/- 0.25% previously. Markets reacted sharply, with JPY strengthening. Economists at TD Securities believe that USD/JPY downside will persist.

More JPY upside

“BoJ widens its YCC band to +/- 0.5% in a surprise move. While a shift in the YCC band was the most plausible option in our view, the widening was bigger and earlier than anticipated, with no prior signalling. We maintain the view that a more extensive policy shift in terms of policy balance rate and 10y JGB target will take place once there is a new BoJ Governor in place. We do not rule out further band widening, however.”

“Despite the sharp knee-jerk move higher in the JPY, we think it will extend further in the coming days given how soon this shift has occurred.”

“We also see a return to FX value as a key driver for the currency space amid peak USD. On that basis, the JPY has a lot more room to run.” 

“Major support levels for USD/JPY comes in the 130/132 area before reassessing the extension. Meanwhile, we see more extension to 90/95 in CAD/JPY and 135 in EUR/JPY though the latter will be less linear given the ECB's hawkishness.”