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- Japanese Yen retraces with tariffs back in focus
Japanese Yen retraces with tariffs back in focus
- The Japanese Yen trades lower against the Greenback, moving away from support levels.
- Former President Trump revealed its running mate while Fed Chairman Powell said nothing.
- The US Dollar Index holds in the 104.00 area and prints small gains on Tuesday.
The Japanese Yen (JPY) eases for a second day on Tuesday after interventions from the Japanese Ministry of Finance last Thursday pushed the Yen from 162.00 to 157.00 against the US Dollar (USD) in just two days. However, the move is starting to fade and be pared back with the turn of events over the weekend, when former US President Donald Trump got shot during a political rally. The event panned out in favor of the former President, increasing his odds in the race towards the White House. Additionally, by picking Senator J.D. Vance as his running mate, Trump chose a firm believer in trade wars and protective policy to shield the domestic economy with even more tariffs than Trump issued back in 2018.
Meanwhile, the US Dollar Index (DXY) – which gauges the value of the US Dollar against a basket of six foreign currencies – is jumping higher for a second day in a row. Markets were a bit disappointed after Fed Chairman Jerome Powell refrained from commenting on any of the next or upcoming Financial Open Market Committee (FOMC) meetings. Traders would have loved to hear at least some clues about how the Chairman sees inflation pan out in the near future and what it would mean for rate cuts.
Daily digest market movers: Tariffs not just for China?
- Bloomberg reports that several traders attribute the weaker Japanese Yen to market pricing in a potential Donald Trump win for the US presidential election.
- Mitsubishi UFJ Morgan Stanley Securities chief foreign-exchange strategist Daisaku Ueno issued a note that a “Trump trade” means a further strengthening of the US Dollar against the Yen (USD/JPY), with stocks and interest rates in the US set to outpace the Japanese ones.
- Japanese equities managed to eke out small gains on Tuesday and have closed off already with small gains locked in.
- The CME Fedwatch Tool shows an 89.4% chance of a 25 basis points (bps) interest rate cut by the Fed in September and 10.4% for a 50 bps cut. An unchanged scenario with no rate change is off the table.
- The Overnight indexed Swap curve for Japan shows a 43.7% chance of a rate hike on July 31 and a 35.9% chance for a hike on September 20.
- The US 10-year benchmark rate trades at the lower end of this week’s range near 4.17%.
- The benchmark 10-year Japan Treasury Note (JGB) trades around 1.02%, a fresh low for July.
USD/JPY Technical Analysis: Intervention risk might be the new normal
Taking a step back at the recent turn of events since this weekend, it looks like markets have switched views and look to be okay for a Trump win in November. This means rather bad news for the Japanese Yen as pressure will now build towards the US Presidential November elections and will see a stronger US Dollar the more Trump leads in the polls. Seeing the support the Japanese Yen received at 157.60, a return to 160.32 looks to be the next step in the coming weeks.
On the downside, the 55-day Simple Moving Average (SMA) near 157.58is working as support and triggered a bounce on Thursday and Friday last week. On the upside, 160.32 is the first pivotal significant level to look out for, where either a rejection could occur to push the JPY back to 157.58, or might break with another rally taking place towards 162.00.
USD/JPY Daily Chart
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, 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 stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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