- The Japanese Yen continues to be weighed down by doubts over the timing of the next BoJ rate hike.
- The recent widening of the US-Japan yield differential further undermined the lower-yielding JPY.
- The USD holds steady near a two-year peak and also supports USD/JPY ahead of the US NFP report.
The Japanese Yen (JPY) meets with a fresh supply during the Asian session on Friday and drifts back closer to a multi-month low against its American counterpart. Data released earlier today showed that real household spending in Japan fell for the fourth month in November and pointed to an economic fragility. This gives the Bank of Japan (BoJ) another reason to be cautious about raising interest rate hikes further, which continues to undermine the JPY.
Meanwhile, the US-Japan bond yield differentials have widened significantly over the past month in the wake of the Federal Reserve’s (Fed) hawkish shift. This further contributes to driving flows away from the lower-yielding JPY, which, along with a bullish US Dollar (USD), acts as a tailwind for the USD/JPY pair. Traders, however, might refrain from placing aggressive bets and opt to wait for the release of the crucial US Nonfarm Payrolls (NFP) report later this Friday.
Japanese Yen bulls remain on the sidelines amid BoJ uncertainty, widening US-Japan yield differential
- Japan’s Economy Minister Ryosei Akazawa said this Friday that Japan’s economy is at a ‘critical stage’ in eradicating the public’s deflationary mindset and shifting to a phase where growth is spearheaded by higher wages and investment.
- Government data released earlier today showed that inflation-adjusted household spending in Japan – a key indicator of private consumption – fell for the fourth month, by 0.4% in November from a year earlier amid stubbornly high prices.
- This comes on top of a drop in real wages for the fourth consecutive month in November and points to broadening inflationary pressure, which keeps the door open for another interest rate hike by the Bank of Japan in January or March.
- Some investors, however, are betting that the BoJ may wait until April to seek confirmation that strong wage momentum will carry over into the spring negotiations between companies and labor unions before pulling the trigger.
- The yield on the benchmark 10-year US government bond remains well within striking distance of its highest levels since the middle of last year touched last week amid the Federal Reserve’s hawkish shift after the December meeting.
- Boston Fed President Susan Collins said on Thursday that the economy is on gradual, uneven trajectory back towards the 2% inflation target and the current outlook calls for a gradual and a patient approach to interest rate cuts.
- Philadelphia Fed President Patrick Harker noted that it is taking longer to get back to 2% inflation than expected. He added that the US central bank is still expected to continue to cut rates but explained that the path will depend on data.
- Kansas Fed President Jeffrey Schmid noted that inflation is moving toward target and growth is showing momentum, while the jobs market is weaker but still healthy. Any further interest rate cuts should be gradual and data-driven.
- Fed Board of Governors member Michelle Bowman said that the current stance of policy may not be as restrictive as others may see it and pent-up demand following the election could pose inflationary risks.
- The US Dollar stands tall near a two-year peak and assists the USD/JPY pair to hold steady above the 158.00 mark as traders keenly await the release of the US jobs data – popularly known as the Nonfarm Payrolls report later today.
USD/JPY move beyond the multi-month top, around 158.55 should pave the way for further gains
From a technical perspective, the near-term bias remains tilted in favor of bullish traders, though the recent range-bound price action makes it prudent to wait for some meaningful buying before positioning for any further gains. The 158.55 area, or the multi-month top touched on Wednesday, could act as an immediate hurdle, above which the USD/JPY pair could aim to reclaim the 159.00 mark. The momentum could extend further towards the 159.45 intermediate hurdle en route to the 160.00 psychological mark.
On the flip side, the overnight swing low, around the 157.60-157.55 region, might continue to protect the immediate downside. Some follow-through selling, however, could make the USD/JPY pair vulnerable to accelerate the slide towards the 157.00 mark en route to the next relevant support near the 156.75 region and the weekly low, around the 156.25-156.20 area. This is followed by the 156.00 mark, which if broken decisively might shift the near-term bias in favor of bearish traders and pave the way for deeper losses.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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