Japanese Yen bears turn cautious near four-decade low amid looming intervention risks
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USD/JPY holds steady near a four-decade high amid a combination of supporting factors.
The US-Japan rate gap and economic risks due to the Mideast conflict undermine the JPY.
Fed rate-hike bets support the USD and spot prices, though intervention risks cap gains.
The USD/JPY enters a bullish consolidation phase during the Asian session on Wednesday and holds steady above the 163.00 mark, near its highest level since 1986 set the previous day. Traders, however, remain on high alert amid speculations that Japanese authorities will step in to prop up the domestic currency. This, in turn, is seen acting as a headwind for spot prices, though the supportive fundamental backdrop backs the case for an extension of the recent well-established uptrend.
Investors remain heavily focused on the wide rate differential between Japan and the US, which keeps the so-called carry trade active and has been a key factor behind the Japanese Yen's (JPY) relative underperformance. Apart from this, economic risks stemming from the continued fighting in the Middle East undermine the JPY. The US Dollar (USD), on the other hand, preserves its gains registered over the past four days and offers additional support to the USD/JPY pair, validating the positive bias.
The Bank of Japan (BoJ) has cautiously started to normalize policy and lifted the short-term policy rate in June to 1.00%, or the highest since 1995. The US Federal Reserve (Fed), on the other hand, is expected to hold its benchmark rate in a target range of 3.50% to 3.75% at the July policy meeting next week. This, however, still leaves a gap of around 250 to 275 basis points (bps), prompting traders to use the low-yielding JPY as a funding currency to finance purchases of higher-yielding assets.
Meanwhile, a cycle of tit-for-tat strikes between the US and Iran keeps the geopolitical risk premium in play, which, along with the closure of the Strait of Hormuz, adds to fresh uncertainty in global energy markets. Given that Japan relies on the critical waterway for over 90% of its Crude Oil imports, the developments raise concerns about Japan's economy and favor the JPY bears. Furthermore, energy-driven inflation risks bolster Fed rate-hike bets, supporting the USD and the USD/JPY pair.
There isn't any relevant market-moving economic data due for release from the US on Wednesday, leaving the Greenback at the mercy of comments from influential FOMC members. Apart from this, further developments surrounding the US-Iran saga might continue to infuse volatility in financial markets and drive the USD, providing some impetus to the USD/JPY pair. Nevertheless, the aforementioned factors suggest that the path of least resistance for spot prices is to the upside.
Japanese Yen Price This week
The table below shows the percentage change of Japanese Yen (JPY) against listed major currencies this week. Japanese Yen was the strongest against the Canadian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.19% | 0.50% | 0.49% | 0.60% | -0.66% | 0.04% | 0.49% | |
| EUR | -0.19% | 0.29% | 0.24% | 0.40% | -0.85% | -0.15% | 0.29% | |
| GBP | -0.50% | -0.29% | -0.07% | 0.10% | -1.14% | -0.45% | 0.04% | |
| JPY | -0.49% | -0.24% | 0.07% | 0.19% | -1.10% | -0.50% | 0.10% | |
| CAD | -0.60% | -0.40% | -0.10% | -0.19% | -1.21% | -0.68% | -0.06% | |
| AUD | 0.66% | 0.85% | 1.14% | 1.10% | 1.21% | 0.70% | 1.19% | |
| NZD | -0.04% | 0.15% | 0.45% | 0.50% | 0.68% | -0.70% | 0.49% | |
| CHF | -0.49% | -0.29% | -0.04% | -0.10% | 0.06% | -1.19% | -0.49% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Japanese Yen from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent JPY (base)/USD (quote).
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