BUZZ-COMMENT-BOJ caution would be kryptonite for yen

USD/JPY bears need a hawkish Bank of Japan or a broadly weaker U.S. dollar to realize profits.

The pair is drifting toward the upper end of a 154.78-156.57 weekly range as concerns over U.S. tariffs ease and rising equity markets reduce demand for the haven currency.

The options market is signaling even calmer conditions ahead. USD/JPY one-year volatility has sunk to 9.5%, its lowest level since early September, as U.S. election concerns abate and new yen hedges are established. A similar measure for EUR/JPY volatility is at its lowest point since November.

The options market also suggests modest yen weakness after an expected 25 basis point rate hike by the Bank of Japan on Friday.

Investors anticipate the BOJ will remain cautious about tightening further, keeping real rates negative. Those expectations will likely change if the central bank sees an end to deflation or if significant wage increases are expected as labor negotiations begin. Until then, fading yen strength is favored.

For USD/JPY, the 155 level provides solid support, but a drop below the Dec. 19 low of 154.45 could lead an unwinding of lingering long positions. Profit-taking at the 21-DMA of 157.12 or its recent cap near 158 may slow its advance. EUR/JPY is up for the fourth consecutive day, moving into the upper half of the 160.04-162.50 21-day Bollinger range.

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(Robert Fullem is a Reuters market analyst. The views expressed are his own.)

((Burton.Frierson@thomsonreuters.com;))