- USD/JPY trades in positive territory for the third consecutive day
- BoJ data suggested an additional $13 billion JPY intervention on Friday.
- Financial markets see the chance of a Fed rate cut by September at 100%.
The USD/JPY pair extends gains near 158.40 on the selling pressure around the Japanese currency during the early Asian session on Wednesday. The US Building Permits, Housing Starts, Industrial Production and the Fed Beige Book will be released later on Wednesday, along with the Federal Reserve’s (Fed) Barkin and Waller speeches.
Data released on Tuesday showed that the Bank of Japan (BoJ) stepped into the foreign exchange market on two consecutive trading days last Thursday and Friday, pushing the Japanese Yen from 162.00 to 157.00 against the USD in just two days.
However, the interest rate differential between Japan and the US continues to weigh on the JPY and create a tailwind for USD/JPY. Earlier this month, the Yen reached a low of 161.94, its lowest since December 1986.
The Japan’s Tankan Manufacturers Sentiment Index rose to 11.0 in July from 6.0 in June. This figure registered the first gain in four months and indicated a pickup in economic activity.
On the other hand, The softer US June Consumer Price Index (CPI) has spurred the chance of Fed rate cuts. The growing speculation that the Fed will cut interest rates by September might cap the pair’s upside. According to the CME FedWatch Tool, traders see the odds of a Fed rate cut by September at 100%, up from 70% a month ago.
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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