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- The USD/JPY pair remains strong around the 161.40 level in early Asian trading on Wednesday.
- Federal Reserve Chairman Jerome Powell said U.S. inflation is slowing again, but more evidence is needed before the bank cuts interest rates.
- The divergence in monetary policy between Japan and the US is putting some selling pressure on the Japanese yen.
The USD/JPY pair is trading firmer near 161.40 after hitting a fresh high for the move near 161.75 during early Asian trading hours on Wednesday. Market players remain focused on a possible FX intervention by the Bank of Japan, which could cap the pair’s advance. The final reading of the Jibun Bank of Japan’s services PMI is due on Wednesday. On the US calendar, the US Employment Change Index for June, the Institute for Supply Management’s services PMI, and the ISM services PMI are due. Federal Open Market Committee Meeting Minutes Will be released.
Weaker U.S. manufacturing PMI data on Monday and weaker personal consumption expenditures inflation reports last week have fueled expectations of a rate cut by the Federal Reserve this year, weighing on the U.S. dollar. Fed Chair Jerome Powell said Tuesday that he has seen progress in inflation over the past year, adding that the central bank is returning to a deflationary path. However, Powell noted that “we want to be more confident that inflation is moving sustainably toward 2 percent before we begin the process of reducing or easing policy.”
Financial markets have adjusted to expectations of two rate cuts this year, in September and before year-end. However, Fed officials have only expected one rate cut at the June meeting. Traders are now pricing in a 63% chance of a 25 basis point rate cut by the Fed in September, up from 58% on Monday, according to the CME FedWatch tool.
The Japanese yen continues to weaken, due to the divergence in monetary policy between the Bank of Japan and the US Federal Reserve. Japanese authorities are concerned about the impact of “rapid and biased” moves in the foreign exchange market on the Japanese economy, and may intervene in the foreign exchange market to prevent the yen from depreciating. This in turn could support the yen in the short term and create headwinds for the economy. USD/JPY Husband.
“USD/JPY continues 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 intervention is to curb excessive volatility,” according to OCBC analysts.
Frequently Asked Questions About Japanese Yen
The Japanese Yen (JPY) is one of the most traded currencies in the world. Its value is largely determined by the performance of the Japanese economy, but more specifically by the policy of the Bank of Japan, the spread between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is to control the currency, so its moves are of great importance to the yen. The BOJ has intervened directly in currency markets at times, generally to depress the yen, though it has often refrained from doing so due to political concerns in its major trading partners. The BOJ’s current ultra-easy monetary policy, underpinned by massive stimulus to the economy, has caused the yen to weaken against its major peers. This process has been exacerbated recently by the growing political divergence between the BOJ and other major central banks, which have opted to raise interest rates sharply to combat decades-high inflation.
The Bank of Japan’s ultra-easy monetary policy stance has widened the gap between the policies of other central banks, especially the US Federal Reserve. This supports a widening gap between the US and Japanese 10-year bonds, which is in favour of the US dollar versus the Japanese yen.
The Japanese yen is often viewed as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money into the Japanese currency due to its perceived reliability and stability. Turbulent times are likely to boost the value of the yen against other currencies that are perceived as riskier to invest in.
