- With the Japanese yen losing its appeal as a safe-haven asset amid easing tensions in the Middle East, the USD/JPY pair is inching towards its April high.
- Geopolitical risks have not completely disappeared, and new Omicron variants pose an external threat.
- Friday is likely to be an important day for USD/JPY due to the Bank of Japan meeting and US PCE inflation data.
USD/JPY on Monday inched towards an April high of 154.79, as easing tensions in the Middle East reduced flows into the safe-haven Japanese yen (JPY). This has a bigger impact on the Japanese yen than the US dollar (USD), even though it remains a safer haven.
The conflict between Israel and Iran has not escalated as much as markets feared. Iran has not fired back after Israel carried out a one-off attack on a military base outside Isfahan on Friday. Demand for the yen, a major safe-haven asset, has declined and the currency has continued to depreciate over the long term against the US dollar.
USD/JPY is at risk
Although hostilities in the Middle East have temporarily subsided, the threat of future outbreaks is an ever-present risk.
Geopolitical risks have not been fully resolved, with the world experiencing a rift between the West and what Gideon Lachman, chief foreign affairs commentator for the Financial Times, calls an “axis of adversaries.” It seems like it is. These include Russia, Iran, North Korea, and China.
Rachman pointed out that the military base outside Isfahan targeted by the Israeli military in Friday’s attack is actually a nuclear enrichment facility using reactor technology supplied by China.
Further eruptions of hostilities or a general rise in geopolitical risk factors would likely push safe-haven assets such as the yen higher and have a bearish impact on USD/JPY.
War is not the only potential source of geopolitical risk that could weigh on USD/JPY. Reports of a new Omicron variant of the coronavirus also destabilized the market at the beginning of the week.
“The WHO has urged caution, but noted that so far the symptoms associated with the new strain have been mild. We expect risk aversion to continue this week as it will take time to assess the impact on the global economy. ” analysts at private investment bank Brown Brothers Harriman said in a note on Monday.
A small number of countries have already introduced mild social distancing measures, but if infections start to spread and pose more serious health risks, this will create a new risk factor for investors, making them less likely to seek safe haven. There is a possibility that the flow of funds will proceed steadily. Above all, the Japanese yen.
USD/JPY traders could emerge on Friday
Friday, April 26, will see the US dollar/USD exchange rate rise as the Bank of Japan (BoJ) holds its April policy meeting and the US releases personal consumption expenditure (PCE) data for March, including Federal Reserve statistics. It is attracting attention as an important day for the yen. (Fed) recommended inflation measure, Personal Consumption Expenditures – Price Index.
If United States (US) PCE inflation rises more than expected, it would signal further delays before the Fed cuts rates, pushing USD/JPY higher. When interest rates remain high for an extended period of time, demand for the US dollar increases from foreign investors looking to save money.
Similarly, if the Bank of Japan raises interest rates at its meeting or withdraws any cues it has planned for the near future, the yen will appreciate (depressing USD/JPY).
The Bank of Japan is unlikely to raise interest rates, and there is a possibility of policy adjustment.
The consensus among institutional analysts is that the Bank of Japan will not raise interest rates until October.
“After raising policy interest rates for the first time in 17 years in March, we expect the Bank of Japan to keep its short-term interest rate target unchanged (range 0-0.1%).We expect the Bank of Japan to maintain a modest and gradual rate hike path going forward. expected,” ABN Amro said.
Deutsche Bank sees a risk that the Bank of Japan will “remove government bond purchasing guidelines from the statement or revise them to make purchasing operations more flexible,” which could support the yen.
Despite seeing the chances of further interest rate hikes as low, many Japanese officials believe the recent rise in the US dollar has been excessive and that steps need to be taken to support the yen. There is.
“The continued weakness of the yen (in part due to the Fed’s rate cuts priced in) increases the likelihood that the Bank of Japan will consider its next rate hike sooner than the current consensus estimate of October 2024 (as indicated by market pricing). ”ABN Amuro said, adding that against this background, Governor Ueda may try to intervene verbally by dropping clues about future tightening.
Last week, the finance ministers of both Japan and South Korea acknowledged their “serious concerns over the recent sharp depreciation of the Japanese yen and South Korean won.” Bank Indonesia has stepped in to intervene to stabilize the plunging currency, according to analysts at Brown Brothers Harriman (BBH).
Is the US dollar impregnable? “It’s hard to see a reason to bet on the US dollar.”
The US dollar is currently basking in the glory of a nearly bulletproof US economy. Apart from Friday’s PCE inflation data, further evidence of the US economy’s success is likely to emerge in other macro statistics released on Tuesday and Wednesday.
“Overall, as long as U.S. economic activity remains strong, the cyclical USD appreciation trend will be maintained. U.S. April preliminary figures PI (Tuesday), Q1 GDP (Thursday), March personal income “Friday’s spending report is expected to confirm the exceptionalism of the U.S. economy,” BBH said in a note on Monday.
USD/JPY bears may face an uphill battle given the perceived intractability of the USD.
“It’s hard to see a reason to bet on the dollar,” Michael Pfister, a currency analyst at Commerzbank, said in an interview with Bloomberg News. “The USD has strengthened over the past two weeks on the back of inflation surprises. On top of that, we have a strong growth advantage and a very hawkish Fed,” the analyst added.
On Friday, the trend for the Federal Reserve to be more cautious about when it begins to cut interest rates gained further momentum. Chicago Fed President Austan Goolsby signaled a longer timeline for rate cuts as inflation progress is “stagnant” and has fallen significantly from its pandemic-era peak of 9.1%. However, it added that it remains stubbornly ahead of the Fed’s target. Meanwhile, Atlanta Fed President Rafael Bostic indicated that the US central bank will not cut interest rates until the end of the year, according to FX Street Editor Lalarit Srijandrun.
