Market Data 
- The Japanese Yen attracts some dip-buyers and remains close to a multi-month peak against the USD.
- BoJ rate hike bets and the narrowing US-Japan rate differential continue to act as a tailwind for the JPY.
- A positive risk tone, tariff jitters, and rebounding US bond yields might cap gains for the safe-haven JPY.
The Japanese Yen (JPY) reverses an intraday dip against a broadly weaker US Dollar (USD) and remains close to a multi-month high touched earlier this week. The growing acceptance that the Bank of Japan (BoJ) will hike interest rates further continues to underpin the JPY. Furthermore, hawkish BoJ expectations continue to push Japanese government bond (JGB) yields higher. The resultant narrowing of the rate differential between Japan and other countries turns out to be another factor lending support to the lower-yielding JPY.
Meanwhile, investors remain concerned that US President Donald Trump could impose fresh tariffs on Japan. Apart from this, a goodish pickup in the US Treasury bond yields and a generally positive tone around the equity markets could cap gains for the safe-haven JPY. This, along with the prevalent US Dollar (USD) selling bias, suggests that the path of least resistance for the USD/JPY pair is to the downside. Traders, however, might opt to wait for the release of the US monthly employment details, or the Nonfarm Payrolls (NFP) report on Friday.
Japanese Yen continues to be underpinned by BoJ rate hike bets, rising JGB yields
- US President Donald Trump alleged that Japan and China are guiding their currencies lower, and hinted that he could impose fresh tariffs on imports if this is not halted.
- The White House announced a one-month delay for US automakers to comply with the US–Mexico– Canada Agreement from the tariffs imposed on Mexico and Canada.
- This helps ease fears of a trade war and boosts investors’ appetite for riskier assets, which, in turn, undermines the safe-haven Japanese Yen during the Asian session.
- Investors continue to bet on additional rate hikes by the Bank of Japan, pushing the yield on the 10-year Japanese government bond to its highest level since June 2009.
- BoJ Deputy Governor Shinichi Uchida said on Wednesday that the central bank will adjust its policy further if the outlook for economic activity and prices is realized.
- The US Treasury bond yields have been falling for six consecutive weeks amid concerns that Trump’s trade barriers could slow economic growth in the long run.
- Moreover, Automatic Data Processing (ADP) reported that private sector employment in the US grew by just 77K in February, falling short of the 140K expected.
- This comes on top of a deterioration in US consumer confidence to a 15-month low and lifted bets that the Federal Reserve will restart cutting interest rates in June.
- The US Dollar bulls seem rather unimpressed by data showing that the economic activity in the US service sector continued to expand at an accelerating pace in February.
- The DXY prolongs its weekly downtrend for the fourth successive day and drops to the lowest level since November 6, which, in turn, should cap the USD/JPY pair.
- Traders now look to the usual Weekly Initial Jobless Claims data from the US for some impetus, though the focus remains on the US Nonfarm Payrolls on Friday.
USD/JPY could slide back towards retesting the multi-month low, around the 148.00 mark
From a technical perspective, the USD/JPY pair has been oscillating in a familiar range over the past two weeks or so. Against the backdrop of the recent sharp fall from the vicinity of the 159.00 mark, or the year-to-date peak touched in January, this might still be categorized as a bearish consolidation phase. 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 and supports prospects for deeper losses.
Hence, a slide back below the 148.40 intermediate support, en route to the 148.00 neighborhood, or a multi-month low touched on Tuesday, looks like a distinct possibility. Some follow-through selling will be seen as a fresh trigger for bearish traders and make the USD/JPY pair vulnerable to accelerate the downfall towards the 147.35 region en route to the 147.00 round figure.
On the flip side, the 149.45-149.50 zone now seems to act as an immediate hurdle ahead of the 149.75 area and the 150.00 psychological mark. Sustained strength beyond the latter might trigger a short-covering rally and lift the USD/JPY pair to the next relevant hurdle near the 150.55-150.60 region. Any further move, however, could be seen as a selling opportunity near the 151.00 round figure and remain capped near the weekly high, around the 151.30 area.
Fed FAQs
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.
