Japanese Yen depreciates as US Dollar gains ground amid improved Treasury yields

• The Japanese Yen depreciates, likely due to thin trading conditions stemming from the holiday on Monday.
• BoJ Governor Ueda stated that the central bank will continue to adjust the level of monetary easing as needed.
• The US Dollar receives support as Treasury yields improve.

The Japanese Yen (JPY) extends its losses for the third consecutive session in holiday-thinned trading on Monday. This downward movement may be influenced by growing concerns that the Bank of Japan (BoJ) is not in a rush to raise interest rates.

The Bank of Japan maintained its interest rate target in the range of 0.15-0.25% at Friday’s meeting. BoJ Governor Kazuo Ueda emphasized that the central bank “will continue to adjust the level of monetary easing as needed to achieve our economic and inflation targets.” Ueda acknowledged that while Japan’s economy is showing moderate recovery, there are still signs of underlying weakness.

The US Dollar (USD) continues to rise as Treasury yields recover their losses. However, the Greenback may encounter challenges due to growing expectations for additional rate cuts by the US Federal Reserve (Fed) in 2024. According to the CME FedWatch Tool, markets are pricing in a 50% chance of a 50 basis point rate cut to a range of 4.0-4.25% by the end of this year.

Daily Digest Market Movers: Japanese Yen depreciates due to concerns of BoJ delaying rate hikes

• Japan’s new “top currency diplomat,” Atsushi Mimura, stated in an interview with NHK that the Yen carry trades accumulated in the past have likely been mostly unwound. Mimura cautioned that if such trades were to increase again, it could lead to heightened market volatility. “We are always monitoring the markets to ensure that does not happen,” he added.
• On Friday, Philadelphia Fed President Patrick Harker stated that the US central bank has effectively steered through a challenging economic landscape in recent years. Harker compared monetary policy to driving a bus, where it’s essential to balance speed.
• Japan’s Finance Minister Shunichi Suzuki stated on Friday that he “will continue to monitor and analyze the impact of the latest US rate cut on the Japanese economy and financial markets.” Suzuki added that the Federal Reserve Bank’s (FRB) perspective on the US economy aligns with the Japanese government’s view that the US economy is likely to expand.
• Japan’s Consumer Price Index (CPI) increased to 3.0% year-on-year in August, up from 2.8% previously, marking the highest level since October 2023. Additionally, the Core National CPI, excluding fresh food, reached a six-month high of 2.8%, rising for the fourth consecutive month and in line with market expectations.
• The Federal Open Market Committee (FOMC) lowered the federal funds rate to a range of 4.75% to 5.0%, marking the Fed’s first rate cut in over four years. Fed policymakers updated their quarterly economic forecasts, increasing the median projection for unemployment to 4.4% by the end of 2024, up from the 4.0% estimate made in June. They also raised their long-term forecast for the federal funds rate from 2.8% to 2.9%.
• Federal Reserve Chair Jerome Powell commented on the aggressive 50 basis point rate cut, saying, “This decision reflects our increased confidence that, with the right adjustments to our policy approach, we can maintain a strong labor market, achieve moderate economic growth, and bring inflation down to a sustainable 2% level.”
• Japan’s Merchandise Trade Balance Total recorded a larger trade deficit of ¥695.30 billion in August, up from ¥628.70 billion the previous month, but well below market expectations of a ¥1,380.0 billion shortfall. Exports increased by 5.6% year-over-year, marking the ninth consecutive month of growth, but fell short of the anticipated 10.0%. Imports rose by just 2.3%, the slowest pace in five months, significantly underperforming the projected 13.4% rise.

Technical Analysis: USD/JPY tests 144.50 near the upper boundary of the descending channel

USD/JPY trades around 144.40 on Monday. The daily chart analysis shows that the pair is moving higher within a descending channel. A break above the upper level of the channel would lead to a momentum shift from bearish to bullish bias. Additionally, the 14-day Relative Strength Index (RSI) is slightly below the 50 level. A break above this threshold could signal the emergence of bullish sentiment.

On the upside, the immediate resistance appears at the upper boundary of the descending channel around the 144.70 level. A breakthrough above this level could support the USD/JPY pair to test the psychological level of the 145.00.

On the downside, the USD/JPY pair could test the 21-day Exponential Moving Average (EMA) at the 143.76 level, followed by the nine-day EMA at the 143.00 level. A break below the latter could push the pair to revisit the 139.58, which is the lowest level since June 2023.

USD/JPY: Daily Chart