Japanese Yen weakens as wide yield gap supports US Dollar

• The Japanese Yen weakens as the wide yield differential supports the US Dollar.
• Japan’s relatively low interest rates and heavy debt burden weigh on the Japanese Yen.
• Traders await BoJ Governor Kazuo Ueda’s remarks and Japan’s wage figures.

The Japanese Yen (JPY) remains on the back foot against the US Dollar (USD) on Monday as the wide yield differential continues to favour the Greenback, while broader structural headwinds weigh on the Japanese currency. At the time of writing, USD/JPY trades around 158.10, up 0.17% on the day.

The benchmark 10-year US Treasury yield holds near 5.34%, close to levels last seen in 2002. Meanwhile, Japan’s 10-year government bond yield stands near 3.10%, its highest level in around 30 years. The spread between the two stands at 224 basis points.

The US Dollar also benefits from broad weakness in the Euro (EUR) amid concerns over France’s public finances. Meanwhile, traders show little reaction to the latest US business activity data. The final S&P Global Services Purchasing Managers’ Index (PMI) was revised slightly higher to 58.8 in September from 58.7, while the Composite PMI was confirmed at 58.4. In contrast, the ISM Services PMI eased to 54.9 from 55.4, narrowly missing the 55.0 forecast.

The US Dollar Index (DXY), which tracks the Greenback against six major currencies, trades around 102.26 after reaching 102.53 earlier in the day. US yields remain elevated as persistent inflation risks keep expectations of further Federal Reserve (Fed) tightening alive, while concerns over Washington’s deteriorating fiscal position add upward pressure on borrowing costs. However, softer-than-expected US employment figures have reduced the likelihood of an immediate rate increase.

According to the CME FedWatch Tool, traders now assign around a 21% probability of a rate hike at the Fed’s October 27-28 meeting, down from 70% a week ago. Markets await Wednesday’s Federal Open Market Committee (FOMC) meeting minutes for fresh guidance, with another increase before year-end still on the table.

On the Japanese side, the country’s heavy debt burden, relatively low interest rates and elevated Oil prices keep the Yen’s outlook vulnerable. Japanese Prime Minister Sanae Takaichi sought to reassure bond investors on Monday, saying the government would “control the annual debt issuance amount appropriately” while monitoring economic conditions, tax revenues, interest rates and debt-servicing costs.

Meanwhile, the Bank of Japan (BoJ) remains on a tightening path, but the Yen has struggled to benefit as other major central banks also maintain restrictive policy settings. Still, traders remain reluctant to build large bearish positions as USD/JPY approaches the 160.00 psychological mark, where the risk of intervention by Japanese authorities could increase.

Looking ahead, BoJ Governor Kazuo Ueda is scheduled to speak on Tuesday, followed by Japan’s Labour Cash Earnings data on Wednesday.