- The Japanese Yen struggles to build on the Asian session gains amid reduced BoJ rate hike bets.
- The prevalent risk-off environment and recession fears offer some support to the safe-haven JPY.
- Aggressive Fed rate cut bets keep the US bond yields depressed, capping the USD and USD/JPY.
The Japanese Yen (JPY) fills the weekly bullish gap opening against its American counterpart amid concerns that harsher US reciprocal tariffs could negatively impact Japan’s economy and force the Bank of Japan (BoJ) to hold rates steady for the time being. However, signs of broadening inflation in Japan keep the door open for further BoJ interest rate hikes in 2025. Apart from this, the prevalent risk-off environment assists the safe-haven JPY in stalling its intraday retracement slide.
Investors remain worried that US President Donald Trump’s reciprocal tariffs would dent the global economic growth. Apart from this, persistent geopolitical tensions lead to an extended sell-off in equity markets across the world. Meanwhile, the anti-risk flow, along with bets for a more aggressive policy easing by the Federal Reserve (Fed), continues to drag the US Treasury bond yields lower. This caps the US Dollar’s (USD) attempted recovery on Friday and caps the USD/JPY pair.
Japanese Yen bulls have the upper hand as tariff carnage roils global markets
- Asian stock markets and US equity futures tumbled at the start of a new week amid growing concerns about a widening global trade war and the mounting risk of recession. US President Donald Trump late last Wednesday imposed a 10% baseline tariff on all imports and higher duties on some of the country’s biggest trading partners. In response, the European Union is all set to join China and Canada in imposing retaliatory tariffs.
- Investors scaled back their bets for early interest rate hikes by the Bank of Japan amid concerns that harsher-than-expected US tariffs could negatively impact Japan’s economy. Japan’s Chief Cabinet Secretary Yoshimasa Hayashi said this Monday that US tariffs are expected to have a big impact on Japan-US economic relations. This, in turn, fails to assist the safe-haven Japanese Yen to capitalize on its modest Asian session gains.
- Meanwhile, Japan’s Prime Minister Shigeru Ishiba said late Sunday that the country would continue pressing the US to lower tariffs on Japanese goods, but acknowledged that progress was unlikely to come overnight. Ishiba added that he is aiming to have a call with Trump this week and also emphasized the importance of domestic support measures in the meantime. This, however, does little to impress the JPY bulls.
- The US Dollar preserves Friday’s modest recovery gains led by the stronger-than-anticipated US Nonfarm Payrolls (NFP) report and hawkish comments from Federal Reserve Chair Jerome Powell. The US Bureau of Labor Statistics (BLS) reported that the economy added 228,000 new jobs in March as compared to the 135,000 market expectations and the previous month’s downwardly revised reading of 117,000.
- Powell acknowledged that Trump’s tariffs could have a stronger-than-anticipated inflationary and economic impact, though policy changes remain on hold for now. Powell stated that inflation is closer to target but still slightly elevated and that the Fed’s job is to avoid temporary price hikes turning into persistent inflation. The Fed is monitoring uncertainty from the Trump administration’s trade policies, Powell added further.
- Market participants, however, seem convinced that the US central bank will resume its rate-cutting cycle at the June policy meeting and lower borrowing costs at least four times by the end of this year to bail out the economy. This, along with the anti-risk flow, drags the yield on the benchmark 10-year US government bond further below the 4.0% mark and might hold back the USD bulls from placing aggressive bets.
USD/JPY seems vulnerable while below 61.8% Fibo. breakpoint, around 147.00
From a technical perspective, last week’s breakdown and acceptance below the 61.8% Fibonacci retracement level of the September-March positive move was seen as a fresh trigger for the USD/JPY bears. Moreover, oscillators on the daily chart are holding deep in negative territory and are still away from being in the oversold zone. This, in turn, suggests that the path of least resistance for spot prices remains to the downside. Hence, any subsequent recovery beyond the 147.00 mark (61.8% Fibo. level) might be seen as a selling opportunity and remain capped near the 147.70 region. This is followed by the 148.00 round figure, which if cleared decisively might trigger a near-term short-covering rally.
On the flip side, the 146.00 mark, followed by the 145.45 region, the 145.00 psychological mark Asian session low, around the 144.80 region, and a multi-month trough, around the 144.55 region touched on Friday, could act as immediate support levels. Some follow-through selling below the latter will reaffirm the negative bias and make the USD/JPY pair vulnerable to accelerate the downfall further toward the 144.00 round figure.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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