USD/JPY seems vulnerable near 145.00, over one-week low amid reviving safe-haven demand
- USD/JPY kicks off the new week on a weaker note amid a combination of negative factors.
- BoJ rate hike bets and a slight deterioration in the global risk sentiment benefit the JPY.
- A surprise downgrade of the US credit rating and dovish Fed expectations weigh on the USD.
The USD/JPY pair attracts fresh sellers on Monday and drops to over a one-week trough, around the 144.80 area during the Asian session. Moreover, the fundamental backdrop suggests that the path of least resistance for spot prices remains to the downside and supports prospects for an extension of the recent retracement slide from a nearly six-week high touched last Monday.
The growing conviction that the Bank of Japan (BoJ) will hike interest rates again in 2025 is seen as a key factor that continues to underpin the Japanese Yen (JPY). Apart from this, a surprise downgrade of the US government's credit rating tempers investors' appetite for riskier assets and benefits traditional safe-haven assets, including the JPY. In fact, Moody's downgraded America's top sovereign credit rating by one notch, to "Aa1" on Friday, due to concerns about the nation's growing debt pile.
Meanwhile, investors seem convinced that the Federal Reserve (Fed) will cut rates further amid signs of easing inflation and the likelihood that the US economy will experience several quarters of sluggish growth. This keeps the US Dollar (USD) depressed at the start of a new week and exerts additional downward pressure on the USD/JPY pair. However, the lack of follow-through selling below the 145.00 psychological mark warrants some caution for bears and before positioning for deeper losses.
Moving ahead, there isn't any relevant market-moving economic data due for release from the US on Monday, leaving the USD at the mercy of speeches from influential FOMC members. Apart from this, the broader risk sentiment will drive the JPY demand and provide some impetus to the USD/JPY pair. Nevertheless, the divergent BoJ-Fed policy expectations validate the near-term negative outlook. Hence, any attempted recovery could be seen as a selling opportunity and is likely to remain capped.
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 BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, 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 supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
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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