The Japanese yen (JPY) is struggling against the robust US dollar (USD), recently reaching its weakest point since mid-February during early Asian trading. There are growing worries about Japan’s financial stability, particularly as Prime Minister Sanae Takaichi has unveiled a new economic stimulus initiative. Furthermore, recent data indicating that Japan’s economy shrank for the first time in six quarters during the third quarter adds to the pressure, compelling the Bank of Japan (BOJ) to delay any interest rate increases and thus contributing to the yen’s downturn.
Additionally, a prevailing risk-averse sentiment in the market is affecting the yen’s appeal as a safe asset. Conversely, the US dollar has climbed to its highest level since late May, driven largely by diminishing expectations for further interest rate cuts from the US Federal Reserve this December, which supports the USD/JPY exchange rate. Despite some verbal intervention from Japanese officials, the yen’s depreciation is likely to persist as traders await the delayed US nonfarm payrolls (NFP) report for potential market catalysts.
Yen-bearers maintain the lead amidst Takaichi’s expansionary fiscal policy and low interest rate stance
- On Thursday, Japan’s Chief Cabinet Secretary Minoru Kihara remarked that recent currency fluctuations have been steep and one-sided, and he is monitoring the foreign exchange market closely, expressing a heightened sense of urgency. He added that the market needs to reflect stable fundamentals.
- This follows a warning from Japan’s Finance Minister Satsuki Katayama on Wednesday, indicating that the government is keeping a vigilant eye on the market. Despite the increased concern over potential intervention, the yen continues to face selling pressures.
- Japan’s yield curve has steepened significantly as traders anticipate a larger-than-expected stimulus package from Prime Minister Takaichi. A key government committee member, Goshi Kataoka, stated earlier this week that a stimulus package of around 23 trillion yen is necessary.
- Kataoka also mentioned on Wednesday that an interest rate hike by the Bank of Japan is unlikely before March, emphasizing the need for the fiscal stimulus to first boost domestic consumption. This indicates the administration’s desire to maintain low interest rates.
- Recent government data indicated a contraction in Japan’s economy from July to September, marking the first decline in six quarters. This further dampens expectations for an imminent rate hike from the Bank of Japan and supports ongoing yen weakness.
- A Reuters survey found that, albeit narrowly, economists expect the Bank of Japan to increase rates to 0.75% by December, with all forecasts anticipating this level by the end of the first quarter. While wage growth is projected to remain strong, the weaker yen and the risk of inflation from imports reinforce this outlook.
- The dollar, nearing its peak since May earlier this month, is bolstered as dovish expectations from the Federal Reserve fade. The likelihood of further rate cuts in December has lessened, as the minutes from the October FOMC meeting revealed divisions among members on future actions.
- Traders are now keenly awaiting the delayed release of the US Nonfarm Payrolls report, which could provide insights into the Fed’s rate strategy. This upcoming report will likely influence the USD, offering additional support for the USD/JPY pair during North American trading.
USD/JPY bulls poised for shifts once the 157.00 mark is breached
The daily Relative Strength Index (RSI) suggests the market is slightly overbought, which might cause traders to hesitate in making new bullish moves on the USD/JPY pair. It may be more prudent to wait for a short-term consolidation or a moderate pullback before considering further gains.
That said, if there is a corrective decline, support could emerge around the 156.65-156.60 range. If this support fails, USD/JPY might fall towards the 156.00 level, with sustained weakness below that point likely triggering a technical sell-off, leading to more significant losses.
On the flip side, the 157.40-157.45 area could serve as an obstacle; surpassing it might help the USD/JPY pair pick up momentum to reclaim the 158.00 mark. The next area of significant resistance is around the mid-158.00s, before prices test January’s highs near 159.00.
economic indicators
Payroll calculation for non-agricultural sectors
The Nonfarm Payrolls release indicates how many jobs were created in the United States each month across nonfarm sectors. The report, published by the US Bureau of Labor Statistics (BLS), can be pretty volatile. Revisions to previous months’ data and the unemployment rate are also significant, with higher figures generally viewed as favorable for the US dollar, while lower numbers could have the opposite effect. Thus, market reactions will depend on how traders interpret the entirety of the data included in the BLS report.
