- The Japanese Yen rallies to a fresh multi-month peak against the USD on Thursday.
- Hopes for a BoJ pivotl boost the JPY and drag USD/JPY closer to sub-141.00 levels.
- The post-FOMC USD selling bias further contributes to the steep intraday decline.
The Japanese Yen (JPY) trims a part of its strong intraday gains against the US Dollar (USD) and assists the USD/JPY pair to recover a few pips from sub-141.00 levels, or its lowest level since late July touched earlier this Thursday. The preavlent risk-on environment, as depicted by an extension of the recent rally across the global equity markets, is seen as a key factor undermining the JPY’s relative safe-haven status. That said, speculations that the Bank of Japan (BoJ) may exit its negative rate policy sooner than anticipated, before the results of labor talks at large companies are known, might continue to boost the domestic currency.
Apart from this, sustained USD selling bias, triggered by the Federal Reserve’s (Fed) dovish shift on Wednesday, contributes to keeping a lid on the USD/JPY pair’s attempted intraday recovery. In fact, the US central bank flagged the end of its policy-tightening campaign at the end of December policy meeting and the so-called “dot plot” indicated a series of interest rate cuts in 2024. Thie leads to a further decline in the US Treasury bond yields and is seen weighing on the Greenback. Nevertheless, the divergent BoJ-Fed outlook, along with narrowing the US-Japan rate differential, might continue to benefit the JPY.
Daily Digest Market Movers: Japanese Yen consolidates strong gains to multi-month top against USD
- Expectations for an imminent shift in the BoJ’s policy stance boost the Japanese Yen, which, along with the post-FOMC US Dollar selling bias, drags the USD/JPY pair closer to the 142.00 mark during the Asian session on Thursday.
- A piece in Japanese media suggests that the Bank of Japan might be unwilling to go in the opposite direction if central banks in the US and Europe place rate cuts on the table and decide to exit negative rates between January and March.
- The Federal Reserve left the policy rate unchanged at 5.25%-5.50% range at the end of a two-day meeting on Wednesday and also acknowledged that inflation has eased, implying that interest rate increases have come to an end.
- Earlier in the day, data from the US showed that the Producer Price Index (PPI) remained unchanged in November, providing further evidence that inflation continues to meander down toward the Fed’s average annual 2% target.
- The Fed’s updated economic projections, which included the so-called “dot plot”, signalled that lower borrowing costs are on the cards and now expect interest rates to fall to 4.6%, suggesting a cumulative 0.75% rate cut next year.
- In the post-meeting press conference, Fed Chair Jerome Powell said that the central bank is not likely to hike further and that it is very focused on not making the mistake of keeping rates too high for too long.
- The yield on the benchmark 10-year US government bond touched its lowest level since August after the Fed decision, while the two-year US Treasury yield, which reflects rate expectations, tumbled to its weakest level since early July.
- Data released this Thursday showed that Japan Machinery Orders, which is seen as a leading indicator of capital spending in the coming six to nine months, rose 0.7% in October, beating consensus estimates for a modest decline.
- Japanese Prime Minister Fumio Kishida set about replacing key cabinet members at the centre of a financial probe on Thursday, battling to control the damage from one of the biggest scandals in decades.
- Four ministers and several deputy ministers are set to go, local news outlets have reported, in the embattled premier’s third cabinet overhaul since he came to office just over two years ago.
- Prosecutors have launched a criminal probe into the faction, and will start questioning dozens of lawmakers for allegations of about 500 million Yen in total of fundraising proceeds missing from official party accounts.
- Japan’s ruling Liberal Democratic Party has agreed on income tax breaks aimed at offsetting the pain of price hikes on households to help change decades of deflationary mindset.
- Traders now look to the latest monetary policy updates by major central banks in Europe for short-term opportunities ahead of the US monthly Retail Sales, expected to fall for the second successive month, by 0.1% in November.
Technical Analysis: USD/JPY bears retain control, might aim to challenge 140.00 psychological mark
From a technical perspective, acceptance below the very important 200-day Simple Moving Average (SMA) and a subsequent breakdown through the 142.00 mark is seen as a fresh trigger for bearish traders. Some follow-through selling below the 141.00 mark has the potential to drag the USD/JPY pair further towards the 140.40 intermediate support en route to the 140.00 psychological mark. Meanwhile, the Relative Strength Index (RSI) on the daily chart is already flashing oversold conditions and warrants caution for bearish traders. This makes it prudent to wait for some near-term consolidation or a modest bounce before positioning for an extension of the recent sharp pullback from the 152.00 neighbourhood, or the YTD peak touched in November.
That said. attempted recovery moves might now confront stiff resistance near the 142.00 round figure. Any further move up is likely to attract fresh sellers and remain capped near the 143.00 mark. A sustained strength beyond the latter, however, could trigger a short-covering rally and lift the USD/JPY pair to the 144.00 mark, which should act as a key pivotal point. Some follow-through buying should pave the way for a further appreciating move, towards the 145.00 psychological mark before spot prices climb to the 145.50-145.60 resistance and the 146.00 round figure.
Japanese Yen price this week
The table below shows the percentage change of Japanese Yen (JPY) against listed major currencies this week. Japanese Yen was the strongest against the US Dollar.
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.