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Japanese Yen refreshes multi-decade low against USD, bears not ready to give up yet

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  • The Japanese Yen continues to be undermined by the BoJ’s uncertain outlook about future rate hikes.
  • Intervention fears and persistent geopolitical tensions could help limit losses for the safe-haven JPY.
  • Reduced Fed rate cut bets favor the USD and support prospects for a further move up for USD/JPY.

The Japanese Yen (JPY) continues with its struggle to register any meaningful recovery against its American counterpart and drops to a fresh multi-decade low during the Asian session on Monday. The Bank of Japan's (BoJ) dovish outlook, indicating that it is in no rush in terms of policy normalization, continues to undermine the JPY. Bearish traders, however, remain on alert and refrain from placing aggressive bets in the wake of the recent warnings by Japanese authorities, showing readiness to intervene in the market to prop up the domestic currency.

Adding to this, persistent geopolitical tensions stemming from a further escalation of conflicts in the Middle East turn out to be another factor lending some support to the safe-haven JPY. The US Dollar (USD), on the other hand, is seen consolidating its recent strong gains to the highest level since early November amid expectations that the Federal Reserve (Fed) may delay cutting interest rates. This, in turn, suggests that the difference in rates between the US and Japan will stay wide for some time, which, in turn, should act as a tailwind for the USD/JPY pair. 

Daily Digest Market Movers: Japanese Yen remains depressed amid the divergent BoJ-Fed policy expectations

  • The Bank of Japan's cautious approach, indicating that accommodative financial conditions will be maintained for an extended period, fails to assist the Japanese Yen in registering any meaningful recovery from a multi-decade low.
  • Japanese government officials continued with their jawboning to defend the domestic currency, which, along with geopolitical developments over the weekend, held back the JPY bears from placing fresh bets and helping limit losses.
  • Iran launched explosive drones and missiles at Israel in retaliation for a suspected Israeli attack on its consulate in Syria, raising the risk of a broader conflict in the Middle East region and lending support to the safe-haven JPY. 
  • Data released from the US last week did little to ease market concerns about still-sticky inflation and forced investors to push back their expectations for the first interest rate cut by the Federal Reserve to September from June. 
  • Moreover, the current market pricing indicates the possibility of less than two rate cuts in 2024 compared to three projected by the Fed, keeping the US Treasury bond yields elevated and acting as a tailwind for the US Dollar. 
  • The divergent BoJ-Fed policy outlook, meanwhile, suggests that the path of least resistance for the USD/JPY pair remains to the upside and supports prospects for an extension of last week's breakout momentum. 
  • Traders now look to the US economic docket, featuring Retail Sales figures and the Empire State Manufacturing Index, which, along with Fedspeak, should influence the USD demand and provide a fresh impetus to the major. 

Technical Analysis: USD/JPY bulls retain control near multi-decade high, could aim to conquer the 154.00 mark

From a technical perspective, last week's sustained breakthrough of a short-term trading range hurdle near the 152.00 mark was seen as a fresh trigger for bulls. The subsequent move-up validates the constructive outlook, though the overbought Relative Strength Index (RSI) on the daily chart makes it prudent to wait for some near-term consolidation before positioning for any further appreciating move. Nevertheless, the USD/JPY pair seems poised to prolong its recent well-established uptrend and aim toward reclaiming the 154.00 round figure.

On the flip side, any meaningful corrective decline below the 153.00 mark is likely to attract fresh buyers and remain limited near Friday's swing low, around the 152.60 region. A convincing break below, however, could prompt some technical selling and drag the USD/JPY pair to the 152.00 mark en route to the 151.40 intermediate support and the 151.00 round figure. The latter should act as a key pivotal point, which, if broken, 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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