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- USD/JPY remains capped below 145.50 amid prospect of US economic slowdown
USD/JPY remains capped below 145.50 amid prospect of US economic slowdown
- USD/JPY hovers around 145.40 in Tuesday’s early Asian session, up 0.83% on the day.
- A series of downbeat US economic data raises concerns about the US economic downturn.
- An unwinding of Yen carry trades weighs on the pair.
The USD/JPY pair recovers some lost ground near 145.40 after falling to the lowest level since January 2 around 141.68 during the early Asian session on Tuesday. The sell-off of the Greenback is triggered by fears of the US recession and expectations of deeper rate cuts by the Federal Reserve (Fed).
Friday’s US employment data showed that the Unemployment Rate rose in July, sparking the likelihood that the US economy is heading into a recession. The markets expect the Fed to cut its interest rate by 50 basis points (bps) in both September and November and another quarter-point cut in December.
Fed fund futures indicated investors priced in a near 99% possibility of a 50 bps cut in the September meeting, according to LSEG data. The expectation of more aggressive rate cuts from the Fed exerts some selling pressure on the US Dollar (USD) across the board.
Chicago Fed President Austan Goolsbee said on Monday that the Fed would respond if economic or financial conditions deteriorated. Meanwhile, San Francisco Fed President Mary Daly stated that the central bank will monitor if the next job market report reflects the same dynamic or reverses, adding that the Fed is prepared to act as they get more information.
On the other hand, the Japanese Yen (JPY) gains momentum as traders unwind carry trades. Furthermore, the expectation that the Bank of Japan (BoJ) will further tighten monetary policy after raising rates last week might boost the JPY in the near term.
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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