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The Japanese Yen dives to a nearly 40-year low amid relatively thin liquidity on Monday.
The divergent BoJ-Fed monetary policy and a positive risk tone weigh heavily on the JPY.
Intervention fears cap USD/JPY amid a modest USD downtick and overbought conditions.
The Japanese Yen (JPY) adds to Friday’s post-Bank of Japan (BoJ) slump and plummets below the 160.00 psychological mark against its American counterpart for the first time since October 1986 during the Asian session on Monday. The BoJ’s cautious approach towards further policy tightening and the uncertain rate outlook suggests that the wide Japan-US rate differential will remain for some time. This, along with a generally positive risk tone, continues to drive flows away from the safe-haven JPY amid relatively thin liquidity on the back of a holiday in Japan.
That said, intervention fears help limit further losses for the JPY amid extremely overstretched conditions on the daily chart. Meanwhile, the US Dollar (USD) kicks off the new week on a softer note and erodes a part of Friday’s goodish recovery gains from a two-week low, which, in turn, holds back traders from placing fresh bullish bets around the USD/JPY pair. That said, the aforementioned fundamental backdrop warrants caution before positioning for any meaningful JPY appreciation ahead of the crucial two-day FOMC policy meeting starting on Tuesday.
Daily Digest Market Movers: Japanese Yen continues to be undermined by the divergent BoJ-Fed policy outlook
The Japanese Yen plummets to a fresh multi-decade low during the Asian session on Monday amid a big divergence in the Bank of Japan’s policy outlook and hawkish Federal Reserve expectations, though intervention fears cap gains.
As was widely anticipated, the BoJ left its short-term interest rates unchanged on Friday and indicated that inflation was on track to hit the 2% target in coming years, suggesting its readiness to hike borrowing costs later this year.
In the post-meeting press conference, BoJ Governor Kazuo Ueda offered few clues on when the next rate hike will come and ruled out shifting to a full-fledged reduction in the bond purchases, warranting caution for the JPY bulls.
Moreover, the Tokyo Consumer Price Index released on Friday indicated that inflation in Japan is cooling, which, along with a generally positive tone around the equity markets, should cap any meaningful upside for the safe-haven JPY.
Japan’s ruling Liberal Democratic Party lost three key by-election seats, which is not seen as a vote of confidence in Prime Minister Fumio Kishida and argued against him being reappointed at the end of the term in September.
The US Bureau of Economic Analysis reported that the Personal Consumption Expenditures (PCE) Price Index rose 0.3% in March, while the yearly rate climbed to 2.7% from 2.5% in February, beating estimates for a reading of 2.6%.
Adding to this, the core PCE Price Index, which excludes volatile food and energy prices, held steady at the 2.8% YoY rate as compared to 2.6% anticipated, reaffirming bets that the Federal Reserve will keep rates higher for longer.
According to the CME Group’s FedWatch tool, investors are now pricing in a 58% chance that the Fed will begin its rate-cutting cycle in September, down from 68% a week ago, and a more than 80% possibility of easing in December.
This suggests that the wide gap in rates between Japan and the United States will remain for some time, which, along with a positive risk tone, should cap the upside for the safe-haven JPY and lend support to the USD/JPY pair.
Investors now look forward to this week’s key central bank event risk – a two-day FOMC monetary policy meeting starting on Tuesday and the closely-watched US Nonfarm Payrolls (NFP) report – for a fresh directional impetus.
Technical Analysis: USD/JPY bulls turn cautious amid extremely overbought RSI on the daily chart
From a technical perspective, Friday’s breakout through an upward-sloping trend channel extending from the YTD low was seen as a fresh trigger for bullish traders. That said, the Relative Strength Index (RSI) on the daily chart is flashing extremely overbought conditions, which makes it prudent to wait for some near-term consolidation or a modest pullback before positioning for further gains. That said, any meaningful slide below the 159.00 mark is likely to attract fresh buyers near the 158.35-158.30 region and remain limited near the 158.00 mark. A convincing break below, however, might prompt some technical selling and drag the USD/JPY pair back towards the ascending channel resistance breakpoint near the 157.00 round figures. Bulls, meanwhile, will remain wary of placing fresh bets amid fears that Japanese authorities will intervene near the 160.00 pivotal point.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.
The Bank’s massive stimulus 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 policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.
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