- The Japanese Yen attracts some buyers and recovers a part of the post-US CPI slump on Wednesday.
- Intervention fears, along with a weaker risk tone, underpin the JPY and exert pressure on USD/JPY.
- The divergent Fed-BoJ policy expectations should limit any meaningful corrective slide for the pair.
The Japanese Yen (JPY) slumped to the weakest level since July 1990 against its American counterpart on Wednesday following the release of hotter-than-expected US consumer inflation figures. The data pushed market expectations about the timing of the first interest rate cut by the Federal Reserve to September from June. Adding to this, minutes of the last FOMCmeeting indicated that officials were worried that the progress on inflation slowed, and they may have to keep rates higher for longer. This marks a big contrast to the Bank of Japan’s (BoJ) cautious approach towards further policy tightening, which suggests that the US-Japan rate differential will stay wide and, in turn, weigh heavily on the JPY.
Meanwhile, expectations that the Fed will keep interest rates higher for longer triggered the overnight steep fall in the US equity markets. This, along with a flurry of verbal warnings from Japanese officials that they would intervene in the markets to prop up the domestic currency, assists the safe-haven JPY to attract some buyers during the Asian session on Thursday. Any meaningful JPY-appreciating move, however, still seems elusive, warranting caution before confirming a near-term top for the USD/JPY pair. Traders now look to the US Weekly Initial Jobless Claims data, which, along with the US Producer Price Index (PPI) and Fedspeak, will drive the USD demand and produce short-term opportunities around the currency pair.
- The US Dollar surged across the board in reaction to the third straight month of strong US consumer price readings, dragging the Japanese Yen to its lowest level since mid-1990 on Wednesday.
- The US Bureau of Labor Statistics (BLS) reported that the headline Consumer Price Index (CPI) rose by the 3.5% YoY rate in March compared to the 3.4% anticipated and 3.2% in the previous month.
- Meanwhile, the annual core CPI, which excludes volatile food and energy prices, held steady at 3.8%, while on a monthly basis, the CPI and the core CPI both rose 0.4% as against the 0.3% estimated.
- This follows last week’s upbeat US jobs data for March and fueled speculations that the Federal Reserve would delay cutting rates, triggering a surge in the US Treasury yields and the US Dollar.
- The FOMC meeting minutes showed concerns over stalling inflation progress, pushing the yield on the two-year and the 10-year US government bonds to their highest level since last November.
- Japanese government officials continued with their jawboning to defend the domestic currency, which, in turn, provides some respite to the Japanese Yen and exerts pressure on the USD/JPY pair.
- Japan’s top currency diplomat, Masato Kanda, reiterated that he won’t rule out any steps to respond to disorderly FX moves and that he is prepared to take necessary actions whenever possible.
- Finance Minister Shunichi Suzuki also offered some verbal intervention, saying that excessive FX moves are undesirable and that he is in constant discussion with Vice Finance Minister Kanda on FX.
- The Bank of Japan struck a dovish tone at the end of the March meeting and stopped short of offering any guidance about future steps, which should keep a lid on any further gains for the JPY.
- Thursday’s US economic docket features the release of the usual Weekly Initial Jobless Claims and the Producer Price Index (PPI) for March, followed by speeches by influential FOMC members.
From a technical perspective, the downtick could be attributed to some profit-taking amid overbought conditions on hourly charts. Any subsequent slide, however, is likely to stall near the 23.6% Fibonacci retracement level of the recent rally from the 150.80 area, or the monthly low touched last Friday. Some follow-through selling below the said support, around the 152.65 region, could drag the USD/JPY pair to the 152.30 zone, or the 38.2% Fibo. level, en route to the 152.00 mark. The latter represents a short-term trading range breakout point and should act as a strong near-term base for spot prices.
On the flip side, the 153.00 round figure might now offer some resistance ahead of the multi-decade peak, around the 153.25 region. A sustained strength beyond will be seen as a fresh trigger for bullish traders and set the stage for an extension of the USD/JPY pair’s recent uptrend witnessed over the past month or so.
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.
