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Japanese Yen trades above multi-decade low against USD, not out of the woods yet

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  • The Japanese Yen ticks higher amid intervention warnings, albeit with a lack of bullish conviction.
  • The divergent Fed-BoJ policy expectations keep a lid on any meaningful JPY appreciation.
  • USD/JPY seems poised to register strong gains and end in the green for the fifth straight week.

The Japanese Yen (JPY) is seen oscillating in a narrow trading band against its American counterpart during the Asian session on Friday and consolidating this week's heavy losses to the lowest level since 1990. The Bank of Japan (BoJ) has offered few cues on when it will increase interest rates further, while the markets are now betting that the Federal Reserve (Fed) will not cut interest rates, at least before the September policy meeting. This, in turn, suggests that the large difference in rates between the US and Japan will stay for some time, which, along with a stable performance around the equity markets, continues to undermine the safe-haven JPY.

The US Dollar (USD), on the other hand, holds steady near the YTD peak in the wake of expectations that the Fed will keep rates higher for longer on the back of still-sticky inflation. This turns out to be another factor acting as a tailwind for the USD/JPY pair, though bulls seem reluctant to place aggressive bets amid the recent verbal warnings from Japanese officials that they would intervene in the markets to stem any further JPY weakness. Nevertheless, the fundamental backdrop suggests that the path of least resistance for the currency pair is to the upside, and any meaningful corrective decline is more likely to be seen as a buying opportunity.

Daily Digest Market Movers: Japanese Yen struggles to register any meaningful recovery amid the BoJ’s dovish outlook

  • The Japanese Yen continues to be weighed down by the Bank of Japan's cautious approach and uncertain outlook for future rate hikes, which, along with a bullish US Dollar, lifted the USD/JPY pair to a fresh 34-year peak on Thursday.
  • The USD climbed to its highest level since November 14 as investors pushed back the expected timing of the first interest rate cut by the Fed to September from June following the release of hot US consumer inflation figures on Wednesday.
  • Investors also pared their bets for the number of rate cuts of 25 basis points (bps) this year to fewer than two, or roughly 42 bps, from about three or four a few weeks ago in the wake of hawkish comments by several Fed officials.
  • Richmond Fed President Thomas Barkin said on Thursday that the latest data did not increase his confidence that disinflation is spreading in the economy and that the central bank is not yet where it wants to be on inflation.
  • Furthermore, New York Fed President John Williams noted that inflation setbacks are not a surprise and that the central bank does not need to change policy in the very near term, though eventually it will need to cut rates.
  • The yield on the rate-sensitive two-year and the benchmark 10-year US government bonds held steady near a five-month peak after data on Thursday showed that the US Producer Price Index (PPI) rose by a modest 0.2% in March.
  • The recent jawboning from Japanese authorities, showing readiness to intervene in the markets to address any excessive falls in the domestic currency, and persistent geopolitical tensions lend some support to the safe-haven JPY.
  • Japan's Finance Minister Shunichi Suzuki reiterated on Friday that he will closely watch FX moves with a high sense of urgency as a weak JPY could push up import prices and have a negative impact on consumers and firms.
  • The USD/JPY pair remains on track to register strong weekly gains, up for the fifth straight week, as market participants now look to the release of the Preliminary Michigan Consumer Sentiment Index for short-term trading impetus.

Technical Analysis: USD/JPY needs to consolidate before the next leg up, 152.00 resistance-turned-support holds the key for bulls

From a technical perspective, the post-US CPI breakout through a two-week-old trading range resistance near the 152.00 mark favors bullish traders. That said, the Relative Strength Index (RSI) on the daily chart – though it has eased from higher levels – is hovering near overbought territory. This makes it prudent to wait for some near-term consolidation or a modest pullback before positioning for any further appreciating move. In the meantime, the multi-decade high, around the 153.25-153.30 region, now seems to act as an immediate hurdle, above which the USD/JPY pair could aim to reclaim the 154.00 round figure.

On the flip side, any meaningful corrective decline below the overnight swing low, around the 152.75 zone, is more likely to attract fresh buyers and remain limited near the trading range breakout point, now turned support, near the 152.00 mark. The said handle should now act as a strong base for the USD/JPY pair, which, if broken decisively, might prompt some profit-taking and pave the way for a slide towards the 151.40 intermediate support en route to the 151.00 round figure. Some follow-through selling will suggest that spot prices have topped out in the near term and shift the bias in favor of bearish traders.

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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