Japanese Yen extends its weakening trend against USD, fresh multi-decade low and counting


  • The Japanese Yen continues losing ground on Tuesday and drops to a fresh multi-decade low.
  • The divergent BoJ-Fed policy expectations turn out to be a key factor weighing on the JPY. 
  • Intervention fears and a softer risk tone could help limit deeper losses for the safe-haven JPY.

The Japanese Yen (JPY) extends its weakening trend on Tuesday and hits a fresh 34-year low against its American counterpart during the early European session amid the Bank of Japan's (BoJ) dovish outlook. In fact, the Japanese central bank stopped short of offering any guidance about future policy steps, or the pace of policy normalization after ending negative interest rates in March. Moreover, a report on Monday suggested that the Bank of Japan (BoJ) will place less emphasis on inflation and shift to a more discretionary approach that lets various data guide the future rate hike path. This, in turn, is seen as a key factor that continues to undermine the JPY, which, along with some follow-through US Dollar (USD) buying, lifts the USD/JPY pair to levels just above mid-154.00s.

The incoming US macro data pointed to sticky inflation and a still-resilient economy, forcing investors to push back their expectations for the first interest rate cut by the Federal Reserve (Fed) to September from June. This suggests that the large difference in rates between the US and Japan will stay for some time, which might continue to drive flows away from the JPY and support prospects for a further near-term appreciating move for the USD/JPY pair. The JPY bears, however, remain on alert and might refrain from placing fresh bets amid the recent warnings by Japanese authorities that they will intervene in the market to prop up the domestic currency. Apart from this, the worsening Middle East crisis should limit losses for the safe-haven JPY and cap the currency pair. 

Daily Digest Market Movers: Japanese Yen fails to gain any respite from intervention warnings, geopolitical risks

  • The Japanese Yen continues to be weighed down by the Bank of Japan's dovish outlook, indicating that it is in no rush in terms of policy normalization, which, along with a bullish US Dollar, keeps the USD/JPY pair pinned near a 34-year peak. 
  • The incoming US data pointed to a still-resilient economy and sticky inflation, raising doubts over how aggressively the Federal Reserve will be able to cut interest rates this year and pushing the US Treasury bond yields to a five-month high. 
  • The US Census Bureau reported on Monday that Retail Sales rose 0.7% in March as compared to market expectations of a 0.3%increase and the previous month's reading was revised higher to show a growth of 0.9% vs. 0.6% reported originally. 
  • This, to a larger extent, helps offset the disappointing release of the Empire State Manufacturing Index, which improved less than expected to -14.3 in April from -20.9 and indicated continued weakness in the manufacturing business activity. 
  • The markets are now pricing in less than two interest rate cuts by the end of 2024 as compared to three projected by the Fed, which lifts the US Dollar to its highest level since November and continues to act as a tailwind for the USD/JPY pair. 
  • Japanese Finance Minister Shunichi Suzuki reiterated on Tuesday that he is closely watching FX moves and will take all possible measures, though refrained from commenting on whether the recent FX moves are too rapid or excessive.
  • Japan's Chief Cabinet Secretary Yoshimasa Hayashi said that it is important for currencies to move in a stable manner, reflecting fundamentals and excessive FX volatility is undesirable, though it does little to provide any respite to the JPY bulls.
  • Expectations that the Fed will keep rates higher for longer, along with the risk of a further escalation of conflicts in the Middle East, weigh on investors' sentiment and lend support to the safe-haven JPY, capping gains for the USD/JPY pair. 
  • Traders now look to the US macro data – Building Permits, Housing Starts and Industrial Production figures – and speeches by influential FOMC members, including Fed Chair Jerome Powell, for some meaningful impetus later this Tuesday.

Technical Analysis: USD/JPY bulls look to build on momentum beyond mid-154.00s, overbought RSI warrants caution

From a technical perspective, the recent breakout through a short-term trading range hurdle near the 152.00 round figure and the subsequent move up was seen as a fresh trigger for bullish traders. That said, the Relative Strength Index (RSI) on the daily chart is flashing overbought conditions, making it prudent to wait for some near-term consolidation or a modest pullback before positioning for any further gains. Meanwhile, any meaningful corrective slide below the 154.00 mark is likely to attract fresh buyers and remain limited near the 153.40-153.35 region. 

This is followed by the overnight swing low or levels just below the 153.00 mark. Some follow-through selling could pave the way for deeper losses and drag the USD/JPY pair further toward the 152.60-152.55 zone en route to the 152.00 resistance-turned-support. On the flip side, momentum beyond the mid-154.00s has the potential to lift spot prices further towards the 155.00 psychological mark. 

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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