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24.04.2024, 01:55

Japanese Yen extends its consolidative price move near multi-decade low against USD

  • The Japanese Yen fails to lure buyers in the wake of the divergent BoJ-Fed policy expectations. 
  • A positive risk tone also undermines the JPY, though intervention fears help limit further losses.
  • Traders also seem reluctant ahead of this week’s key central bank event risk and US macro data.

The Japanese Yen (JPY) continues with its struggle to register any meaningful recovery and languishes near a multi-decade low against its American counterpart during the Asian session on Wednesday. Traders now seem reluctant and opt to wait for the crucial Bank of Japan (BoJ) policy decision on Friday. Apart from this, investors this week will confront the release of the Advance Q1 GDP report and the Personal Consumption Expenditures (PCE) Price Index from the US on Thursday and Friday, respectively. The combination of key central bank event risk and important US macro data will play a key role in determining the next leg of a directional move for the USD/JPY pair.

In the meantime, expectations that the gap in interest rates between the US and Japan will stay wide, along with a generally positive risk tone, continue to undermine the safe-haven JPY. However, speculations that Japanese authorities will intervene to prop up the domestic currency hold back the JPY bears from placing aggressive bets. Furthermore, the US Dollar (USD) hangs near its lowest level in over a week touched in the aftermath of disappointing US PMIs on Tuesday and turns out to be another factor that contributes to capping the USD/JPY pair. That said, hawkish Federal Reserve (Fed) expectations should act as a tailwind for the buck and limit the downside for the currency pair. 

Daily Digest Market Movers: Japanese Yen seems vulnerable amid BoJ’s uncertainty rate outlook

  • The Bank of Japan's cautious approach, indicating that accommodative financial conditions will be maintained for an extended period, fails to assist the Japanese Yen in registering any meaningful recovery from a multi-decade low.
  • Hopes that the Iran-Israel conflict will not escalate further ease geopolitical tensions in the Middle East and remain supportive of a generally positive risk tone, which turns out to be another factor undermining the safe-haven JPY. 
  • The JPY bulls shrugged off a survey by the Finance Ministry, showing that about 70% of companies in Japan will raise pay scale in the fiscal year 2024 and that about 40% of firms were struggling with labor shortages even after raising wages. 
  • The recent verbal warnings from Japanese officials that they would intervene in the markets to stem any further weakness in the domestic currency hold back bearish traders from placing fresh bets and help limit deeper losses.
  • Investors keenly await the outcome of the highly-anticipated two-day BoJ policy meeting on Friday for cues on when the central bank will raise interest rates again, which, in turn, will determine the near-term trajectory for the JPY.
  • The US Dollar is pressured by weaker US PMI figures for April released on Tuesday, indicating that the economic upturn lost momentum at the start of the second quarter, and contributes to keeping a lid on the USD/JPY pair. 
  • The S&P Global Composite Purchasing Managers Index (PMI) fell to 50.9 in April's flash estimate, suggesting that the business activity in the US private sector continued to expand, albeit at a softer pace than in the previous month. 
  • Meanwhile, the S&P Global Manufacturing PMI dropped to 49.9 from 51.9 in April, highlighting a contraction in business activity, while the gauge for the services sector declined to 50.9 from March's final reading of 51.7.
  • Investors, however, seem convinced that the Federal Reserve is unlikely to begin its rate-cutting cycle in June and have also scaled back their expectations about the total number of rate cuts in 2024 to less than two.
  • Traders now look to Wednesday's release of the US Durable Goods Orders, though the focus remains on the Advance Q1 GDP and the Personal Consumption Expenditures (PCE) Price Index on Thursday and Friday, respectively.

Technical Analysis: USD/JPY might consolidate further amid overbought RSI on the daily chart

From a technical perspective, the range-bound price action witnessed over the past week or so could be categorized as a bullish consolidation phase against the backdrop of the recent blowout rally from the March swing low. However, the Relative Strength Index (RSI) on the daily chart is flashing overbought conditions and warrants some caution. 

This, in turn, suggests that the USD/JPY pair is more likely to extend its consolidative price move or witness a modest pullback before the next leg up. That said, any meaningful corrective slide is likely to find decent support near the 154.55-154.45 region ahead of the 154.00 mark. The latter should act as a key pivotal point, which if broken could drag spot prices back towards last Friday's low, around the 153.60-153.55 area. 

On the flip side, the multi-decade high, just ahead of the 155 psychological mark, might continue to offer some resistance to the USD/JPY pair. A sustained strength beyond the latter will be seen as a fresh trigger for bullish traders and set the stage for an extension of a nearly two-month-old upward trajectory.

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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