Japanese Yen refreshes daily low as rising US bond yields helps revive USD demand

  • The Japanese Yen struggles to preserve its intraday gains and drops to a fresh low against the USD.
  • Reduced bets for an eventual hawkish BoJ pivot undermine the JPY and lend support to USD/JPY.
  • A fresh leg up in the US bond yields boosts the USD and further acts as a tailwind for the major. 

The Japanese Yen (JPY) surrenders its intraday gains against the US Dollar (USD) and lifts the USD/JPY pair to a fresh daily peak, around the 144.30 area during the first half of the European session on Tuesday. Government stimulus measures in the wake of a devastating New Year's Day earthquake in Japan might have already delayed the Bank of Japan's (BoJ) plan to pivot away from its ultra-dovish stance. Adding to this, falling rates of inflation in Tokyo – Japan’s capital city – reaffirmed bets that the BoJ will not exit the negative interest rates policy in January. This, along with a stable performance around the equity markets, is seen undermining the safe-haven JPY.

The USD, on the other hand, is underpinned by a fresh leg up in the US Treasury bond yields, bolstered by diminishing odds for a more aggressive policy easing by the Federal Reserve (Fed). This turns out to be another factor contributing to the USD/JPY pair's goodish intraday recovery of around 90 pips from the vicinity of a technically significant 200-day Simple Moving Average (SMA). That said, a fall in US Consumer Inflation Expectations reaffirmed market bets that the Fed will start cutting interest rates as early as March. This might hold back the USD bulls from placing aggressive bets ahead of the latest US consumer inflation figures, due for release on Thursday. 

Daily Digest Market Movers: Japanese Yen remains vulnerable to slide further against USD

  • The Japanese Yen fails to capitalize on its Asian session gains on Tuesday and the fundamental backdrop suggests that the path of least resistance is to the downside. 
  • Inflation in Japan’s capital fell as expected, with Tokyo core Consumer Price Index (CPI) inflation, which excludes volatile fresh food prices, rising 2.1% YoY in December.
  • A core reading that excludes both fresh food, and fuel prices, and is closely watched by the Bank of Japan as a measure of underlying inflation, eased from 3.6% to 3.5%.
  • Adding to this, the headline Tokyo CPI inflation fell from 2.6% in the prior month to an annualized 2.4% in December and is now within spitting distance of the BoJ's annual target.
  • This comes on top of a deadly earthquake in Japan and dampens hopes for an imminent shift in the BoJ's dovish stance at the January 22-23 monetary policy meeting.
  • Japan’s Finance Minister Suzuki Shunichi announces a 4.74 billion Yen spending and is considering expanding reserve funds of FY-24/25 budget plans for Noto Peninsula earthquake.
  • The US Dollar remains on the defensive in the wake of last week's mixed US economic data and bets that the Federal Reserve will start easing its monetary policy soon.
  • The New York Fed said in a report on Monday that US consumers' projection of inflation over the short run fell to the lowest level in nearly three years in December.
  • The latest survey showed that inflation is expected to be at 3% one year from now, or the lowest reading since January 2021, as against a projection of 3.4% in November.
  • Investors, however, have been paring bets for early interest rate cuts by the Fed, which remains supportive of elevated US bond yields and should act as a tailwind for the USD.
  • Atlanta Fed President Raphael Bostic noted that inflation has declined more than expected and that the US central bank still needs to give tight policy time to work on cooling off inflation. Bostic sees two 25 bps cuts by year-end 2024.
  • Fed Governor Michelle Bowman said that the current policy stance appears sufficiently restrictive and that inflation could fall further with policy rate held steady for some time, though the upside inflation risks remain.

Technical Analysis: USD/JPY hits fresh daily top, lacks follow-through and remains below mid-144.00s

From a technical perspective, some follow-through buying beyond the 144.30 area could trigger a short-covering rally and lift the USD/JPY pair to the 145.00 psychological mark. The subsequent move up might shift the bias back in favour of bullish traders and allow spot prices to make a fresh attempt to conquer the 146.00 mark with some intermediate barrier near mid-145.00s.

On the flip side, weakness back below the 144.00 mark now seems to find support near the 143.70 area, or the 38.2% Fibonacci retracement level of the recent strong recovery from a multi-month low touched in December. A convincing break below the latter will expose the 200-day SMA support, currently near the 143.40 region, before the USD/JPY pair drops to the 143.25 region, en route to the 143.00 mark, or the 50% Fibonacci retracement level.

(This story was corrected on January 9 at 10:20 GMT to say, in the technical analysis section, that the 200-day SMA is at 143.40, not 143.25.)

Japanese Yen price today

The table below shows the percentage change of Japanese Yen (JPY) against listed major currencies today. Japanese Yen was the strongest against the US Dollar.

USD   -0.08% -0.11% -0.01% -0.13% -0.47% -0.11% -0.15%
EUR 0.09%   -0.02% 0.08% -0.08% -0.41% -0.03% -0.09%
GBP 0.11% 0.03%   0.10% -0.04% -0.36% 0.00% -0.04%
CAD 0.01% -0.07% -0.09%   -0.13% -0.46% -0.10% -0.14%
AUD 0.14% 0.08% 0.06% 0.17%   -0.34% 0.05% -0.02%
JPY 0.50% 0.42% 0.41% 0.50% 0.36%   0.40% 0.36%
NZD 0.11% 0.03% 0.02% 0.11% -0.05% -0.39%   -0.04%
CHF 0.17% 0.08% 0.06% 0.15% 0.02% -0.30% 0.05%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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