Japanese Yen remains on the back foot against USD amid BoJ rate-hike uncertainty
- The Japanese Yen struggles to capitalize on its modest intraday uptick against the USD.
- The uncertainty over the BoJ’s rate-hike plan and a positive risk tone undermines the JPY.
- Bets for smaller Fed rate cuts keep the USD elevated and also lend support to USD/JPY.
The Japanese Yen (JPY) surrenders modest intraday gains against its American counterpart on Thursday and moves back closer to the lowest level since early August touched earlier this week. A fall in Japan's exports during September, for the first time in 10 months, raised concerns about weakness in global demand. Against the backdrop of Japanese Prime Minister Shigeru Ishiba's surprise opposition to further rate hikes, the data further complicates the Bank of Japan's (BoJ) plans to exit years of ultra-easy monetary policy and undermines the JPY.
Apart from this, a generally positive tone around the equity markets is seen as another factor acting as a headwind for the safe-haven JPY. The US Dollar (USD), on the other hand, stands firm near its highest level in over two months amid expectations that the Federal Reserve (Fed) will proceed with modest rate cuts over the next year. This keeps the yield on the benchmark 10-year US government bond above the 4% threshold and further weighs on the low-yielding JPY, which, in turn, lifts the USD/JPY pair back above the 149.50-149.55 region.
Daily Digest Market Movers: Japanese Yen seems vulnerable amid fading hopes for more BoJ rate hikes
- According to a Reuters poll, a slim majority of economists expect that the Bank of Japan will forgo raising interest rates again this year amid uncertainty over the new political leadership's preference for the monetary policy.
- Data published by Japan's Ministry of Finance on Thursday showed that total exports in September dropped 1.7% from a year earlier as compared to a revised 5.5% rise in the previous month and missing consensus estimates.
- Soft demand in China – Japan's biggest trading partner – and a slowing US growth, along with the JPY's recent appreciation following the BoJ’s unexpected interest rate hike in late July, pushed down the value of exports.
- This could further complicate the BoJ's rate-hike plans and cap any meaningful appreciating move for the JPY, though persistent geopolitical risks stemming from the ongoing conflicts in the Middle East might offer support.
- The United Nations (UN) said that Israeli forces have fired at its peacekeeping position, forcibly entered a base, stopped a critical logistical movement, and injured more than a dozen of its troops in southern Lebanon.
- According to a source familiar with the matter, Israel’s plan of a counterstrike in response to Iran’s October 1 attack is ready, raising the risk of a further escalation of tensions in the Middle East and a broader regional war.
- The US Dollar rose to its highest level since early August on Wednesday amid firming expectations for a less aggressive policy easing by the Federal Reserve and bets for a 25 basis points rate cut at the November meeting.
- The yield on the benchmark 10-year US government bond dropped to over a one-week low on Wednesday, albeit it defends the 4.0% threshold, which favors the USD bulls and should offer support to the USD/JPY pair.
- Traders look to the US economic docket – featuring the release of monthly Retail Sales, Weekly Initial Jobless Claims and the Philly Fed Manufacturing Index – for some impetus later during the North American session.
Technical Outlook: USD/JPY could accelerate the positive move once 150.00 barrier is cleared
From a technical perspective, the USD/JPY pair has been oscillating in a familiar range since the beginning of this week. Against the backdrop of the recent rise from a 14-month low touched in September, this might still be categorized as a bullish consolidation phase. Moreover, oscillators on the daily chart are holding in positive territory and are still away from being in the overbought zone, supporting prospects for an eventual breakout to the upside. That said, it will still be prudent to wait for a sustained strength above the 150.00 psychological mark before placing fresh bullish bets. Spot prices might then accelerate the move up towards the August monthly swing high, around the 150.85-150.90 region. Some follow-through buying beyond the 151.00 round figure will be seen as a fresh trigger for bullish traders and pave the way for further near-term appreciation.
On the flip side, the 149.00 mark, representing the lower boundary of the short-term trading range, might continue to protect the immediate downside. A convincing break below has the potential to drag the USD/JPY pair to the next relevant support near the 148.55 region en route to the 148.00 round figure and last week's swing low, around the 147.35-147.30 area. The latter is followed by the 147.00 mark, which if broken decisively will suggest that the recent move-up witnessed over the past month or so has run its course and prompt aggressive technical selling.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
