Japanese Yen consolidates near multi-decade low against USD, not out of the woods yet

  • The Japanese Yen remains depressed near a multi-decade low amid the BoJ’s dovish outlook.
  • Reduced Fed rate cut bets lift the USD to a fresh YTD top and further lend support to USD/JPY.
  • Intervention fears and a softer risk tone could help limit deeper losses for the safe-haven JPY.

The Japanese Yen (JPY) remains on the back foot against its American counterpart through the Asian session on Tuesday and hangs near a 34-year low touched the previous day. 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, in turn, is seen as a key factor that continues to undermine the JPY. 

Investors, meanwhile, remain on alert in the wake of the possibility of an intervention by Japanese authorities to support the domestic currency. Moreover, a generally weaker risk tone, amid persistent geopolitical tensions stemming from the ongoing conflicts in the Middle East, does little to provide any respite to the JPY bulls. The US Dollar (USD), on the other hand, climbs to its highest level since early November in the wake of hawkish Fed expectations, suggesting that the path of least resistance for the USD/JPY pair is to the upside. traders now look to the US macro data and speeches by influential FOMC members, including Fed Chair Jerome Powell, for short-term opportunities. 

Daily Digest Market Movers: Japanese Yen languishes near multi-decade low amid BoJ’s uncertain rate outlook

  • The Japanese Yen continues to be weighed down by the Bank of Japan’s dovish outlook, indicating that it is in no rush in terms of policy normalization, which, along with a bullish US Dollar, keeps the USD/JPY pair pinned near a 34-year peak. 
  • The incoming US data pointed to a still-resilient economy and sticky inflation, raising doubts over how aggressively the Federal Reserve will be able to cut interest rates this year and pushing the US Treasury bond yields to a five-month high. 
  • The US Census Bureau reported on Monday that Retail Sales rose 0.7% in March as compared to market expectations of a 0.3%increase and the previous month’s reading was revised higher to show a growth of 0.9% vs. 0.6% reported originally. 
  • This, to a larger extent, helps offset the disappointing release of the Empire State Manufacturing Index, which improved less than expected to -14.3 in April from -20.9 and indicated continued weakness in the manufacturing business activity. 
  • The markets are now pricing in less than two interest rate cuts by the end of 2024 as compared to three projected by the Fed, which lifts the US Dollar to its highest level since November and continues to act as a tailwind for the USD/JPY pair. 
  • Japanese Finance Minister Shunichi Suzuki reiterated on Tuesday that he is closely watching FX moves and will take all possible measures, though refrained from commenting on whether the recent FX moves are too rapid or excessive.
  • Japan’s Chief Cabinet Secretary Yoshimasa Hayashi said that it is important for currencies to move in a stable manner, reflecting fundamentals and excessive FX volatility is undesirable, though it does little to provide any respite to the JPY bulls.
  • Expectations that the Fed will keep rates higher for longer, along with the risk of a further escalation of conflicts in the Middle East, weigh on investors’ sentiment and lend support to the safe-haven JPY, capping gains for the USD/JPY pair. 
  • Traders now look to the US macro data – Building Permits, Housing Starts and Industrial Production figures – and speeches by influential FOMC members, including Fed Chair Jerome Powell, for some meaningful impetus later this Tuesday.

Technical Analysis: USD/JPY bulls turn cautious amid overbought RSI, not ready to give up yet

From a technical perspective, the recent breakout through a short-term trading range hurdle near the 152.00 round figure and the subsequent move up was seen as a fresh trigger for bullish traders. That said, the Relative Strength Index (RSI) on the daily chart is flashing overbought conditions, making it prudent to wait for some near-term consolidation or a modest pullback before positioning for any further gains. Meanwhile, any meaningful corrective slide below the 154.00 mark is likely to attract fresh buyers and remain limited near the 153.40-153.35 region. 

This is followed by the overnight swing low or levels just below the 153.00 mark. Some follow-through selling could pave the way for deeper losses and drag the USD/JPY pair further toward the 152.60-152.55 zone en route to the 152.00 resistance-turned-support. On the flip side, momentum beyond the mid-154.00s has the potential to lift spot prices further towards the 155.00 psychological mark. 

Bank of Japan FAQs

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.

The Bank’s massive stimulus 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 policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.

A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.

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