Japanese Yen struggles for second consecutive day as US CPI-related boost fades

Source Fxstreet
May 17, 2024 11:30
  • The Japanese Yen softened on Friday as BoJ’s Ueda faced questions in parliament.
  • The Yen is trading flat for the week, unable to hold on to gains against the Greenback. 
  • The US Dollar Index extends recovery for a second day after Wednesday’s meltdown. 

The Japanese Yen (JPY) trades flat for the week, posting a second day of losses against the  US Dollar (USD) on Friday. The JPY is struggling against the Dollar during the latter part of the week, almost reversing the surge it registered on Wednesday against the US Dollar after the US Consumer Price Index (CPI) report showed inflation pressures are easing.  Bank of Japan (BoJ) President Kazuo Ueda faced on Friday questions in the parliament on monetary policy and recent market events, but investors reacted rather tepidly as he didn’t provide any real market-moving comments. 

Meanwhile, the DXY US Dollar Index – which gauges the value of the US Dollar against a basket of six foreign currencies – is trying to extend recovery from the steep decline it faced after the CPI data for April. However, there are not many reasons left for the Greenback to outperform. The interest rate differential could still provide some strength to the US Dollar, but the economic data is no longer really outperforming and inflation is back on track towards its disinflationary path. 

Daily digest market movers: A very empty calendar ahead

  • Friday’s economic calendar doesn’t include any release for the US, so market participants can digest recent data while a slew of US Federal Reserve (Fed) officials are set to speak before the close of the week:
    • At 14:15 GMT, Federal Reserve Bank of Minneapolis President Neel Kashkari will have opening remarks at the International Organization for Standardization Technical Committee 68 (ISO/TC 68) financial services plenary meeting.
    • Kashkari will introduce Federal Reserve Governor Christopher Waller, who will give a speech about payment innovation at the same stage. 
    • Near 16:15 GMT, Federal Reserve Bank of San Francisco President Mary Daly delivers a speech at the University of San Francisco School of Management commencement ceremony.
    • Daly and Waller are both voting members of the Federal Open Market Committee (FOMC) this year. 
  • Equities trade mixed on Friday. Japan has closed off, with the Topix up 0.30% and the Nikkei down 0.34% on the day, while US equity futures are still looking for direction ahead of the US opening bell. 
  • The CME Fedwatch Tool suggests a 91.3% probability that June will still see no change to the Federal Reserve's fed fund rate. Odds have changed for September, with the tool showing a 50.5% chance that rates will be 25 basis points lower than current levels.
  • The benchmark 10-year US Treasury Note trades around 4.39%, and hovers near the lower levels for this week. The benchmark 10-year Japan Treasury Note (JGB) trades around 0.949%, and is just a touch below the high of this week at 0.957%.

USD/JPY Technical Analysis: Dollar buyers are sitting where they are

The USD/JPY pair still has some room to go, with buyers who bought at that 153.00 area not really taking much profit, seeing that no chunky outflows are being noticed. This creates a small imbalance in the trade which sees buyers willing to pay higher prices to get in. Although a revisit to the 160.00 area looks a bit of a stretch, a recovery to 156.74 first and 158.00 next could be in the cards, likely to open the risk again of another intervention. 

Bank of Japan FAQs

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.

The Bank’s massive stimulus 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 policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.

A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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