Hawkish Fed expectations underpin the USD and provide an additional lift to the USD/JPY pair.
Investors now look to the BoJ and Fed policy decisions before placing fresh directional bets.
The Japanese Yen (JPY) remains depressed for the fifth straight day on Monday and weakens further below the 149.00 mark, to over a one-week low against its American counterpart during the Asian session. The Bank of Japan (BoJ) Governor Kazuo Ueda last week offered a slightly bleaker assessment of the economy. This, along with the weaker Machinery Orders data from Japan and the headlines that the BoJ will conduct an unscheduled bond operation this week, undermines the JPY.
The JPY bulls, meanwhile, seem rather unimpressed by the positive outcome from the spring wage negotiations, which should allow the BoJ to exit its negative interest rate policy sooner rather than later. The US Dollar (USD), on the other hand, continues to draw support from expectations that the Federal Reserve (Fed) will stick to its higher-for-longer interest rates narrative to bring down inflation. This, in turn, is seen as another factor that contributes to the bid tone surrounding the USD/JPY pair.
Traders, however, seem reluctant to place aggressive directional bets ahead of this week’s key central bank event risks – the BoJ decision on Tuesday, followed by the FOMC policy update on Wednesday. This, in turn, warrants some caution for the USD/JPY bulls and before positioning for any further appreciating move. Nevertheless, the fundamental backdrop suggests that the path of least resistance for spot prices remains to the upside and any corrective slide is likely to get bought into.
The Bank of Japan Governor Kazuo Ueda sounded a bit dovish last week and said that policymakers will debate whether the outlook is bright enough to phase out the massive monetary stimulus, which is seen undermining the Japanese Yen.
The BoJ will conduct an unscheduled bond operation, offering to buy 3 trillion yen of Japanese government bonds (JGBs) in an agreement starting on Tuesday and ending on Thursday, suggesting that the BoJ’s easy policy might not be over yet.
Data released earlier this Monday showed that Machinery Orders in Japan fell more than expected, by 1.7% in January, and turns out to be another factor exerting pressure on the JPY, though the downside is more likely to remain limited.
Rengō – Japan’s largest trade union confederation – said that average wage demands topped 5% for the first time since 1994, setting the stage for the BoJ to exit the negative rates policy sooner rather than later, which should limit the JPY losses.
Meanwhile, the hotter-than-expected US producer and consumer price data released last week forced investors to trim their bets for a more aggressive policy easing by the Federal Reserve, which continues to lend some support to the US Dollar.
The University of Michigan’s preliminary survey report showed that the US Consumer Sentiment Index ticked lower to 76.5 in March, from 76.9 in February, while one-year and five-year inflation expectations were little changed this month.
Investors might now prefer to move to the sidelines and look to the latest monetary policy updates by the BoJ and the Fed on Tuesday and Wednesday, respectively, before determining the next leg of a directional move for the USD/JPY pair.
From a technical perspective, a move beyond the 61.8% Fibonacci retracement level of the February-March downfall might have already set the stage for additional gains. Given that oscillators on the daily chart have just started gaining positive traction, the USD/JPY pair seems poised to appreciate further towards the 149.75-149.80 horizontal resistance. Some follow-through buying, leading to a subsequent move beyond the 150.00 psychological mark, might trigger a short-covering rally towards the 150.65-150.70 region en route to the 151.00 neighbourhood, or the YTD peak touched on February 13.
On the flip side, the Asian session low, around the 149.00 mark, now seems to protect the immediate downside. Any further downfall is more likely to attract some dip-buying and remain limited near the 148.30 region. This is followed by the 148.00 round figure, below which the USD/JPY pair could accelerate the slide towards the 100-day Simple Moving Average (SMA), currently pegged near the 147.65 region. A convincing break below might shift the bias in favour of bearish traders and drag spot prices to the 147.00 mark en route to the monthly swing low, around the 146.50-146.45 region.
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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