- Japanese Yen continues its recovery into the weekend on potential for divergent monetary policy.
- BoJ has started normalizing policy as other central banks are close to reaching the end of their tightening cycles.
- USD/JPY declines sharply after Nonfarm Payrolls miss brings into doubt further Fed rate hikes.
The Japanese Yen (JPY) closed into strength against the US Dollar for the week on Friday. The USD/JPY pair closed at 149.28, down 116 pips for the daily session. The pair was still above its intraday low of 149.18.
Nonfarm Payrolls (NFP) for October gained 150K on Friday, much lower than expectations and inducing weakness in the Greenback. US Treasury yields dropped precipitously on the NFP print.
The Yen trades higher in most pairs at the end of the week after recovering from oversold conditions following the dramatic post-Bank of Japan (BoJ) meeting sell-off on Tuesday. The Yen may be benefiting from the market view that the BoJ will eventually normalize its ultra-loose monetary policy stance at a time when most other central banks are expected to be ending their tightening cycles.
Permanently negative interest rates in Japan have kept the Yen weak vis-a-vis other currencies, whose central banks have been raising interest rates to combat inflation. Investors tend to park their capital where it can manifest the highest risk-free returns, putting the Yen at a severe disadvantage. With most major central banks now having reached peak interest rates, however, the tables could turn if the BoJ starts tightening.
At the last BoJ meeting, the board of governors made a first step towards tightening or normalizing policy, when it relaxed its cap on 10-year Japanese Government Bond (JGB) yields, essentially a form of quantitative easing.
The reason the Yen still sold-off after the meeting, however, was because Bank of Japan Governor Kazuo Ueda remarked that most inflation was still coming from higher commodity prices rather than increased demand, suggesting the BoJ would need to keep interest rates lower for longer.
Daily digest market movers: Yen recovers on divergent monetary policy outlook
- The Yen continues to recover against most majors into the weekend as market perceptions see the potential for policy divergence between BoJ and other major central banks.
- The BoJ could start raising rates at a time when the other central banks are reaching their peak interest rates or lowering them, which would provide the perfect monetary policy differential for a period of dramatic strengthening for the Japanese currency.
- On Friday, the Yen gains the most against the US Dollar (USD), after the release of the October Nonfarm Payrolls report leads traders to offload the Dollar.
- The report shows a weakening of most labor metrics in October, further adding weight to the view that the Federal Reserve (Fed) is now done with raising interest rates.
- Payrolls themselves rose by only 150K versus the 180K forecast, and way below the 297K (itself revised down from 336K) of the previous month.
- Average Earnings rose by only 0.2% MoM versus the 0.3% expected, Average Weekly Hours worked fell to 34.3 from 34.4, and the Unemployment Rate rose to 3.9% from 3.8% expected and the same previously.
- The Yen is hampered by a lack of demand-driven inflation. BoJ Governor Ueda said inflation is mainly due to rising input costs due to higher commodity prices, especially Oil, rather than being “demand driven”.
- His comments suggest the BoJ will need to continue to maintain easy monetary policy for longer than had been hoped to inject growth into the economy, rather than to start to hike rates.
- The Yen is further hampered by a disconnect between the actions of the BoJ and its rhetoric. Despite changing the 1.0% JGB yield cap to a reference point for intervention rather than a hard ceiling, the BoJ still intervened midweek to cap rising yields as they inched closer to the 1.0% mark, basically continuing to treat the level as a ceiling, according to a report by Reuters.
Japanese Yen technical analysis: USD/JPY short-term uptrend at risk of reversing
USD/JPY – the amount of Yen that one Dollar buys – sank after the release of lackluster Nonfarm Payrolls led to mass ditching of the Dollar.
From a short-term perspective the decline brings the pair perilously close to a trend reversal. A break below the 148.80 low of October 30 would provide much stronger evidence of bears finally turning the tables on bulls, as it is the last major lower high of the short-term uptrend.
US Dollar vs Japanese Yen: 4-hour Chart
There are further signs of weakness: the pair has cleanly broken out the rising channel it has been in – disrespecting for the second time this week, the lower boundary line.
It has cut straight through the 50 and 100-four hour Simple Moving Averages (SMA) and is challenging the 200.
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US Dollar vs Japanese Yen: Daily Chart
On the daily chart, which measures the medium-term trend, the uptrend still looks solid, except for the channel breakout. The 148.80 lows is still the level to watch and if it is not broken bulls will continue to hold out hope of a recovery. Apart from that, the next major support level is the 50-day SMA at 148.63.
The Moving Average Convergence Divergence (MACD) indicator has been showing bearish divergence for some time, as it has been falling whilst price was rising during the last days of October. Nevertheless, this is not sufficient on its own to suggest the medium-term uptrend has reversed.
Ultimately the “trend is your friend..” as the saying goes, and for USD/JPY the short, medium and long-term trends are all still bullish, suggesting the odds continue to favor more upside eventually.
If the 151.93 32-year-high of 2022 is breached, the uptrend will be reconfirmed, with next targets expected to be met at the round number marks – 153.00, 154.00, 155.00 etc.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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