BUZZ-COMMENT-Yen may falter on a BoJ hike

Jan 21 (Reuters) - U.S. tariffs and BOJ policy are set to be the big drivers of USD/JPY, with downside yen risks growing even if a rate hike materializes.

With Day 1 market euphoria over the avoidance of immediate tariffs followed shortly followed by President Donald Trump threatening 25% duties on Canadian and Mexican goods in two weeks, FX conditions are best described as choppy.

Still, USD/JPY was flat during the U.S. morning on Tuesday, trading in the mid-155s as dips continue to meet solid demand from support at 154.80-1.55.

Markets will continue to stay alert for tariff updates, though the takeaway so far is that the Trump administration has not been as hawkish than initially feared. In turn, traders may begin to take some chips off the table regarding dollar exposure. For the yen however, this would likely mean cross-yen higher and thus limit setbacks in the USD/JPY, which will need to lean on U.S. yields for direction.

On the Bank of Japan, there was yet another round of reports in Japanese press pointing towards a rate hike this week and as highlighted previously, the yen has struggled to build a buy-the-rumour trade.

Consequently, while USD/JPY is holding the recent lows in the lead up to the decision, the bar has been raised for the central bank to surprise hawkishly.

As a result, this heightens the risk of a dovish hike. Given that a rate hike has been priced in, it is increasingly likely that the yen will be sold on the fact.

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(Justin McQueen is a Reuters market analyst. The views expressed are his own.)

((justin.mcqueen@thomsonreuters.com))