- The Japanese yen hit a new monthly low against the US dollar on Friday.
- The yen continues to fall as expectations for the Bank of Japan's interest rate hike in December fade.
- Rising US Treasury yields support the US dollar and the USD/JPY pair.
The Japanese yen (JPY) pared some of its intraday losses against the US yen, recovering slightly from its lowest point in more than two weeks on Friday. Concerns about geopolitical tensions and trade wars, as well as a slight deterioration in global risk sentiment, have prompted some haven capital outflows, benefiting the yen. Meanwhile, the US dollar (USD) has consolidated its weekly gains to a monthly high, further helping to limit further gains for the USD/JPY pair above the 153.00 mark.
That said, markets are increasingly confident that the Bank of Japan (BOJ) will not raise interest rates at next week's policy meeting, which could deter yen bulls from making aggressive bets. Additionally, rising U.S. Treasury yields, supported by expectations that the Federal Reserve will be cautious about cutting interest rates, will be a headwind for the low-yielding yen. Investors may also choose to stay on the sidelines ahead of next week's FOMC and Bank of Japan policy meetings.
Cautious mood supports Japanese yen as focus shifts to next week's FOMC/BOJ meeting
- The Bank of Japan's quarterly Tankan survey showed on Friday that the composite index of business confidence among major manufacturers rose to +14 in the September-December period, the highest level since March 2022. Additionally, businesses expect inflation to rise by 2.4% annually. from now.
- Expectations that Japan's consumer prices will remain above the Bank of Japan's 2% target, along with a modestly expanding economy and the fastest pace of wage growth since November 1992, give the Bank of Japan new reasons to raise interest rates. are. However, media reports suggest the Bank of Japan may hold off on raising interest rates this month.
- Reuters reported on Thursday that the Bank of Japan is leaning toward keeping interest rates unchanged next week, citing sources familiar with the bank's thinking. The report added that policymakers would like to spend more time scrutinizing overseas risks and clues about next year's wage outlook.
- Bloomberg reported Wednesday that Bank of Japan officials believe there is little cost to waiting to raise rates, but remain open to raising rates next week, depending on data and market developments. This, along with mixed signals from BOJ officials, heightens uncertainty about December's policy decision.
- Bank of Japan Governor Kazuo Ueda recently said that the time for the next interest rate hike is approaching. In contrast, Toyoaki Nakamura, a dovish board member at the Bank of Japan, said the bank needs to act cautiously in raising interest rates. This continues to weigh on the Japanese Yen, pushing the USD/JPY pair to more than two-week highs.
- The U.S. Bureau of Labor Statistics reported Thursday that the composite producer price index (PPI) rose 0.4% in November, up from an upwardly revised 0.3% rise in the previous month. Moreover, the annual rate accelerated to 3% during the reporting month from the 2.6% increase recorded in October.
- Annual core PPI rose 0.2% in November to 3.4% compared to the same period last year, exceeding expectations. This comes on top of Wednesday's U.S. consumer inflation data, which shows progress in lowering inflation toward the Federal Reserve's 2% goal has stalled.
- This may force the Fed to take a more cautious stance and point to the possibility that it may cut rates at a slower pace than previously expected. This continues to support further increases in US Treasury yields, pushing the US dollar to a monthly high and also weighing on the low-yielding yen.
- Market attention now turns to next week's major central bank event risks, namely the outcome of the much-anticipated two-day FOMC monetary policy meeting and the Bank of Japan's key decisions. In the meantime, traders may choose to move to the sidelines and refrain from betting in an aggressive direction.
USD/JPY attracts push buying and is likely to find decent support around the 152.00 round figure
From a technical perspective, bullish traders should exercise some caution as there is no follow-through buying beyond the 152.70-152.80 confluence. This area consists of the 200-period simple moving average (SMA) on the 4-hour chart and the 50% retracement level of the recent pullback from multi-month highs. Given that the oscillator on the daily/4-hour chart remains in positive territory, if the strength above it persists, the USD/JPY pair will reach the 153.65 region, or the 61.8% Fibonacci retracement. It could rise to the 153.00 mark on the way to the level. This momentum could further expand and the spot price could regain the 154.00 mark.
On the flip side, weakness below the 152.00 mark may continue with support around the 151.75 area or 38.2% Fibo. level. The above area is close to the overnight swing low and should serve as a key focal point going forward. Some follow-through selling could cause the USD/JPY pair to drop below the round value of 151.00 and further decline towards the intermediate support at 150.50 and finally to the psychological mark of 150.00.
Frequently asked questions about risk sentiment
In the world of financial terminology, two terms are widely used: “risk-on” and “risk-off” to refer to the level of risk an investor is willing to accept during a given period of time. In a “risk-on” market, investors are optimistic about the future and are more willing to buy risky assets. In a “risk-off” market, investors begin to “play it safe” out of fear for the future, so they buy low-risk assets that are guaranteed to yield a return, even if it is a relatively small amount.
Typically, during “risk-on” periods, the stock market rises, and so do the values of most commodities, except gold. This is to benefit from positive growth prospects. The currency of a country that is a large exporter of primary products will appreciate due to increased demand, and the virtual currency will appreciate. In a “risk-off” market, bonds, especially major government bonds, rise, gold shines, and safe-haven currencies such as the Japanese yen, Swiss franc, and US dollar all profit.
Minor currencies such as the Australian dollar (AUD), Canadian dollar (CAD), New Zealand dollar (NZD), ruble (RUB) and South African rand (ZAR) all tend to rise in “riskier” markets. This is because the economies of these currencies rely heavily on commodity exports for growth, and commodity prices tend to rise during risk-on periods. High economic activity This is because investors are anticipating an increase in demand for raw materials in the future.
The major currencies that tend to appreciate during “risk-off” periods are the US dollar (USD), the Japanese yen (JPY), and the Swiss franc (CHF). The U.S. dollar is the world's reserve currency, because investors buy U.S. government bonds in times of crisis, and is considered safe because the world's largest economy is unlikely to default. The yen is due to increased demand for Japanese government bonds, and since a high percentage of the value is held by domestic investors, there is little chance of a fire sale of government bonds even during a crisis. The Swiss Franc is a popular choice because Switzerland's strict banking laws provide investors with greater capital protection.
