Japanese Yen bears flirt with multi-decade low amid divergent Fed-BoJ policy expectations
|- The Japanese Yen struggles to build on its modest intraday gains and hangs near a multi-decade low.
- The divergent Fed-BoJ policy expectations undermine the JPY and lend some support to USD/JPY.
- Intervention fears might hold back the JPY bears from placing fresh bets and cap gains for the pair.
The Japanese Yen (JPY) surrenders modest intraday gains against its American counterpart, pushing the USD/JPY pair above the 153.00 mark during the early European session on Thursday and back closer to a multi-decade high touched the previous day. Expectations that the US-Japan rate differential will stay wide turn out to be key factor undermining the JPY and acting as a tailwind for the currency pair. In fact, the Bank of Japan (BoJ) struck a dovish tone at the end of the March meeting and stopped short of offering any guidance about future policy steps, or the pace of policy normalization.
In contrast, the hot US Consumer Price Index (CPI) report released on Wednesday forced investors to push back expectations for the timing of the first interest rate cut by the Federal Reserve to September from June. Moreover, minutes of the last FOMC meeting indicated that officials were worried that the progress on inflation slowed, and they may have to keep rates higher for longer. This, along with signs of stablity across the global equity markets, dents demand for the safe-haven JPY and assists the USD/JPY pair to rebound around 35-40 pips from the Asian session low near the 152.75 region.
Investors, meanwhile, remain on alert in the wake of the possibility of an intervention by Japanese authorities to support the domestic currency. This might hold back the JPY bears from placing fresh bets and keep a lid on any further upside for the USD/JPY pair. That said, the overnight breakout through a short-term trading range and the emergence of some dip-buying on Thursday suggests that the path of least resistance for the USD/JPY pair is to the upside. Traders now look to the US PPI report, which, along with speeches by influential FOMC members, might provide some impetus.
Daily Digest Market Movers: Japanese Yen bears retain control amid a big divergence in the Fed-BoJ policy expectations
- The US Dollar surged across the board in reaction to the third straight month of strong US consumer price readings, dragging the Japanese Yen to its lowest level since mid-1990 on Wednesday.
- The US Bureau of Labor Statistics (BLS) reported that the headline Consumer Price Index (CPI) rose by the 3.5% YoY rate in March compared to the 3.4% anticipated and 3.2% in the previous month.
- Meanwhile, the annual core CPI, which excludes volatile food and energy prices, held steady at 3.8%, while on a monthly basis, the CPI and the core CPI both rose 0.4% as against the 0.3% estimated.
- This follows last week's upbeat US jobs data for March and fueled speculations that the Federal Reserve would delay cutting rates, triggering a surge in the US Treasury yields and the US Dollar.
- The FOMC meeting minutes showed concerns over stalling inflation progress, pushing the yield on the two-year and the 10-year US government bonds to their highest level since last November.
- Japanese government officials continued with their jawboning to defend the domestic currency, which, in turn, provides some respite to the Japanese Yen and exerts pressure on the USD/JPY pair.
- Japan's top currency diplomat, Masato Kanda, reiterated that he won't rule out any steps to respond to disorderly FX moves and that he is prepared to take necessary actions whenever possible.
- Finance Minister Shunichi Suzuki also offered some verbal intervention, saying that excessive FX moves are undesirable and that he is in constant discussion with Vice Finance Minister Kanda on FX.
- Japan’s Chief Cabinet Secretary Yishimasa Hayashi said that it is important for currencies to move in stable manner reflecting fundamentals and that he won't rule out any steps to respond to excessive FX moves.
- Ceasefire talks between Israel and Hamas have yielded no agreement, which, along with a possible Iranian retaliation over a suspected Israeli strike on its embassy in Syria, drive some haven flows towards the JPY.
- The Bank of Japan struck a dovish tone at the end of the March meeting and stopped short of offering any guidance about future steps, which should keep a lid on any further gains for the JPY.
- Thursday's US economic docket features the release of the usual Weekly Initial Jobless Claims and the Producer Price Index (PPI) for March, followed by speeches by influential FOMC members.
Technical Analysis: USD/JPY setup favours bulls, trading range breakout near the 152.00 mark holds the key
From a technical perspective, the downtick could be attributed to some profit-taking amid overbought conditions on hourly charts. Any subsequent slide, however, is likely to stall near the 23.6% Fibonacci retracement level of the recent rally from the 150.80 area, or the monthly low touched last Friday. Some follow-through selling below the said support, around the 152.65 region, could drag the USD/JPY pair to the 152.30 zone, or the 38.2% Fibo. level, en route to the 152.00 mark. The latter represents a short-term trading range breakout point and should act as a strong near-term base for spot prices.
On the flip side, the 153.00 round figure might now offer some resistance ahead of the multi-decade peak, around the 153.25 region. A sustained strength beyond will be seen as a fresh trigger for bullish traders and set the stage for an extension of the USD/JPY pair's recent uptrend witnessed over the past month or so.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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