Japanese Yen underperforms as elevated Oil prices weigh, US Dollar recovers

• USD/JPY rebounds as the Japanese Yen underperforms across the board.
• Stronger US Jobless Claims data and a rebound in Treasury yields support the US Dollar.
• Traders await Japan’s inflation data and preliminary PMI reports from Japan and the US.

USD/JPY rebounds on Thursday, recovering most of the previous day’s losses as the US Dollar (USD) stages a modest recovery after falling to a three-month low. At the time of writing, USD/JPY trades around 159.05, up roughly 0.55% on the day.

The Greenback finds support as US Treasury yields rebound from Wednesday’s sharp pullback, which was triggered by the US Treasury Department’s announcement that it would increase its liquidity-support buybacks for longer-dated government securities. Both the 10-year and 30-year yields are up around 6 basis points on Thursday.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 98.90, bouncing from an intraday low of 98.56, its weakest level since May 14. Weekly US labour-market data also offer some support, with Initial Jobless Claims falling to 206K in the week ending August 15, below expectations of 210K and the upwardly revised previous reading of 212K.

Meanwhile, the Japanese Yen (JPY) is underperforming all its major peers, with elevated Oil prices acting as a major near-term headwind, while broader fiscal concerns and relatively low interest rates remain longer-term drags on the currency.

Data released on Thursday showed that Japan’s imports and exports both climbed to record highs in July. Imports surged 27.8% YoY, driven by rising energy costs, while exports increased 23.2%. The country recorded a trade deficit of ¥634.5 billion.

Strategists at Societe Generale remain constructive on the medium-term outlook for the Yen but stress that any meaningful rebound is likely to be conditional. They argue that “in due course, a yen recovery” is possible, yet only “with the caveat that it will probably take another round of FX intervention to turn USD/JPY lower, unless oil prices fall significantly and remove that headwind from the growth outlook.”

On the monetary policy front, the Bank of Japan (BoJ) is expected to raise interest rates in September. In contrast, recent US economic data have strengthened expectations that the Federal Reserve (Fed) will keep rates unchanged next month.

St. Louis Fed President Alberto Musalem said on Thursday that, given the current level of interest rates, he sees a lower probability of inflation returning to the 2% target. Musalem added that “hiking rates now could save more aggressive action later.”

Looking ahead, Japan’s National Consumer Price Index (CPI) and the preliminary Purchasing Managers’ Index (PMI) reports for both Japan and the US are due on Friday.