Japanese Yen Remains Tepid Despite Intervention Threat, Services Sector in Spotlight

• The USD/JPY pair reached a 38-year high at 161.91.
• The yield on the 10-year Japanese government bond rose to its highest level in about 13 years at 1.11%.
• The US dollar rose slightly as the yield on the two-year Treasury note recovered.

The Japanese Yen (JPY) lost some ground against the US Dollar (USD) on Wednesday. The USD/JPY pair reached a fresh high of 161.91, a level not seen since 1986. The rally can be attributed to final data indicating that business activity in Japan turned to contraction in June. Market participants are focusing on the possibility of the Bank of Japan’s intervention in the foreign exchange market, which could support the yen and limit the pair’s advance.

Japan’s 10-year government bond yields rose to a near 13-year high of 1.11 percent. Traders continue to assess the Bank of Japan’s monetary policy outlook amid a sharp decline in the yen, which is pushing up import costs and contributing to inflationary pressures. Reuters reported, citing two government sources, that Japan’s finance ministry may offer a new type of floating-rate bond to help investors mitigate risks from rising bond yields. The move comes as Japanese officials prepare for further interest rate hikes by the Bank of Japan.

The US dollar (USD) continues its losing streak, possibly due to dovish comments from Federal Reserve officials. The USD may limit its decline as US Treasury yields improve, with the 2-year and 10-year notes at 4.75% and 4.43% respectively at the time of writing. Traders await the US inflation data ADP Employment Change, ISM Services PMI for June, and Federal Open Market Committee Meeting Minutes The meeting is scheduled to be held on Wednesday.

Daily Market Movers Summary: Japanese Yen Falls on Weak Services PMI

• Japan’s services sector purchasing managers’ index (PMI) released by Jibun Bank was revised to 49.4 in June from 49.8 in May. This was down from May’s reading of 53.8 and marks the first decline in services activity since August 2022.
• Federal Reserve Chairman Jerome Powell turned slightly hawkish on Tuesday. Powell said the Fed is back on a contractionary path. However, Powell wants to see more evidence before cutting interest rates as the U.S. economy and labor market remain strong, according to Reuters.
• “I see some warning signs that the real economy is weakening,” Chicago Fed President Austin Goolsbee warned Tuesday during an interview with CNBC. Goolsbee also said progress toward the Fed’s 2% inflation target could accelerate faster than expected.
• “A better-than-expected Tankan survey in June should maintain optimism about the possibility of a second rate hike and provide further insights into the plan to taper Japanese government bond purchases at the Bank of Japan’s upcoming meeting on July 30-31,” Philip Wee, chief foreign exchange strategist at DBS, said on Tuesday. Japan’s Tankan large manufacturing index rose to 13 in the second quarter, up from a previous reading of 11, hitting a two-year high amid an improving economic outlook.
• The Bank of Japan is expected to cut its monthly bond purchases by about $100 billion (16.00 trillion yen) in the first year under its quantitative easing plan due to be released this month, according to the latest Reuters poll conducted between June 25 and July 1. The adjustment would take monthly purchases to about 4.65 trillion yen, down from the current pace of about 6.00 trillion yen. In the second year, respondents to the poll expect further cuts, with monthly purchases averaging about 3.55 trillion yen.
• Japanese Finance Minister Shunichi Suzuki said on Tuesday that he was “closely monitoring the movements of the foreign exchange market with caution.” Suzuki declined to comment on specific levels of the foreign exchange market, noting that there was no change in the government’s stance on the foreign exchange market, according to Reuters.
• On Monday, OCBC Bank strategists Francis Cheung and Christopher Wong noted that “USD/JPY continued to trade near recent highs. It is also near its highest level since 1986. There are expectations that Japanese authorities may intervene soon. While the level of the JPY is one factor to consider, officials are also focusing on the pace of decline as the intention of the intervention is to curb excessive volatility.”

Technical Analysis: USD/JPY maintains stability above 161.50

The USD/JPY pair is trading at 161.60 on Wednesday. The daily chart analysis indicates a bullish bias as the pair holds ground near the upper boundary of the ascending channel pattern. However, caution is advised as the 14-day Relative Strength Index (RSI) is above 70, indicating overbought conditions and hinting at a possible correction in the near term.

The USD/JPY pair may test the upper boundary of the ascending channel near the 161.80 level. A break above this level may reinforce the bullish sentiment, which may push the pair towards the psychological resistance level at the 162.00 level.

On the downside, we see immediate support around the nine-day exponential moving average (EMA) at 160.60. A break below this level could weaken the bullish bias, potentially directing USD/JPY Towards the lower bound of the ascending channel near 158.60. Further decline below this channel support could lead to a test of the June low at 154.55.

USD/JPY: Daily Chart