The Japanese yen (JPY) surged to a 1.5-week high against a notably weaker US dollar (USD) during Monday’s trading in Asia. Comments from Bank of Japan (BoJ) Governor Kazuo Ueda indicated that interest rate hikes are on the horizon. This pushed Japanese government bond (JGB) yields to their highest levels in years. Consequently, the interest rate gap between Japan and other major economies is narrowing, which seems to be giving the yen a boost as the week begins.
There’s also a prevailing weak sentiment in the stock market, which enhances the yen’s reputation as a safe-haven asset. On the flip side, the US dollar remains soft, influenced by expectations of a dovish Federal Reserve. This contributed to the USD/JPY pair dropping to around 155.50-155.45. Traders are now anticipating major macroeconomic announcements from the US, starting with the ISM Manufacturing PMI later today, as they seek new impulses.
Japanese yen bulls aim to take the lead, backed by expectations from Bank of Japan hawks
- Ueda reiterated on Monday that, provided prices and economic conditions evolve as anticipated, the central bank is positioned to raise interest rates further. He mentioned that the chances of the Bank of Japan’s growth and inflation scenarios materializing are becoming more favorable.
- This affirms market speculation of a possible BoJ rate hike in December or January, with the yield on the two-year government bond climbing to 1% for the first time since June 2008. Moreover, the 20-year government bond yield has reached its highest since November 2020, which is pushing the low-yielding yen upwards.
- In related news, Japan’s Ministry of Finance reported a 2.9% year-on-year increase in capital investment for the July-September period—marking three consecutive quarters of growth. However, this is a slowdown from a 7.6% increase in the previous quarter and hasn’t significantly impacted the yen.
- Japan’s composite PMI for November was set at 52.0, up from 51.5 the previous month. This indicates moderate growth in the private sector, driven by a slower decline in factory activity, which has now contracted for five months, alongside ongoing growth in services.
- Prime Minister Sanae Takaichi has committed to prudent financial management while keeping a close watch on interest rate developments. This, in conjunction with the weak US dollar trend, is adding some downward pressure on the USD/JPY pair during the Asian session.
- Comments from various Fed officials have stirred expectations for a potential rate cut in December, leading the US Dollar Index (DXY) to its lowest level in nearly two weeks, which is weighing on the USD/JPY pair.
- Traders are keenly awaiting the US ISM Manufacturing PMI for momentum later in the North American session. Additionally, the important US macro data set for release this week could significantly influence the US dollar and the USD/JPY pair.
USD/JPY may accelerate decline below confluence support at 155.40-155.35
Currently, bears are watching for a solid break below the 155.40-155.35 range, representing the 100-period simple moving average (SMA) on the 4-hour chart. Even though technical indicators on the daily chart remain positive, the oscillator there is showing negative momentum. This suggests the USD/JPY pair might find support around the psychological level of 155.00. However, if follow-through selling takes place, it could pave the way for an extension of the week-long downtrend.
On the other hand, any attempts at a significant recovery may face challenges before reaching the round figure of 156.00. If strength persists beyond this point, it could encourage a short covering move towards the 156.65-156.70 area, which might allow the USD/JPY to reclaim the 157.00 mark. Momentum could further stretch toward the 157.45-157.50 level, with targets set towards November’s multi-month high near 158.00.
