Japanese Yen experiences volatility as US Dollar holds gains despite a dovish Fed
|- The downside of the Japanese Yen could be limited as BoJ is highly expected to implement further rate hikes.
- Recent economic growth in Japan raises the possibility of another near-term BoJ rate hike.
- The US Dollar gains ground as Treasury yields attempt to retrace recent losses.
The Japanese Yen (JPY) declines against the US Dollar (USD) on Tuesday. However, the downside of the JPY could be restrained amid the rising possibility of another near-term interest rate hike. Japan's economy grew at an annualized rate of 3.1% in the second quarter, significantly exceeding expectations and rebounding from a slowdown earlier in the year.
According to Reuters, the Bank of Japan (BoJ) had projected that a strong economic recovery would help inflation reach its 2% target sustainably. This would justify further interest rate increases, following last month's hike as part of the BoJ's ongoing effort to unwind years of extensive monetary stimulus. On Friday, BoJ Governor Kazuo Ueda is set to discuss the central bank's decision last month to raise interest rates.
The US Dollar (USD) retraces its recent losses due to risk aversion sentiment. However, the Greenback faced challenges after remarks from Federal Reserve (Fed) officials heightened the prospect of upcoming rate cuts. On Monday, Minneapolis Fed President Neel Kashkari suggested that it would be appropriate to consider potential US interest rate cuts in September, citing concerns about a weakening labor market, according to Reuters.
Daily Digest Market Movers: Japanese Yen depreciates despite a hawkish BoJ
- Federal Reserve Bank of San Francisco President Mary Daly emphasized Sunday that the US central bank should take a gradual approach to reducing borrowing costs, according to the Financial Times. Additionally, Federal Reserve Bank of Chicago President Austan Goolsbee warned that central bank officials should be cautious about keeping a restrictive policy in place longer than necessary, per CNBC.
- On Thursday, Kazutaka Maeda, an economist at Meiji Yasuda Research Institute, said that the reports are simply positive overall and “it supports the BoJ’s view and bodes well for further rate hikes, although the central bank would remain cautious as the last rate increase had caused a sharp spike in the Yen.”
- Japanese Economy Minister Yoshitaka Shindo stated that the economy is anticipated to recover gradually as wages and income improve. Shindo also added that the government will collaborate closely with the Bank of Japan to implement flexible macroeconomic policies.
- Japan's Gross Domestic Product (GDP) grew by 0.8% quarter-on-quarter in Q2, surpassing market forecasts of 0.5% and rebounding from a 0.6% decline in Q1. This marked the strongest quarterly growth since Q1 of 2023. Meanwhile, the annualized GDP growth reached 3.1%, exceeding the market consensus of 2.1% and reversing a 2.3% contraction in Q1. This was the strongest yearly expansion since Q2 of 2023.
- US headline Consumer Price Index (CPI) rose 2.9% year-over-year in July, slightly down from the 3% increase in June and below market expectations. The Core CPI, which excludes food and energy, climbed 3.2% year-over-year, a slight decrease from the 3.3% rise in June but aligned with market forecasts.
- Rabobank's senior FX strategist, Jane Foley, observes that this week's series of US data releases, along with next week's Jackson Hole event, should provide the market with clearer insights into the potential responses of US policymakers. However, their main expectation is that the Fed will reduce rates by 25 basis points in September and likely cut them again before the end of the year.
Technical Analysis: USD/JPY hovers around 146.50
USD/JPY trades around 146.60 on Tuesday. Analysis of the daily chart shows that the pair is just below the nine-day Exponential Moving Average (EMA), indicating a short-term bearish trend. Furthermore, the 14-day Relative Strength Index (RSI) is slightly above 30, suggesting a potential correction for the pair.
For support levels, the USD/JPY pair might test the seven-month low of 141.69, which was reached on August 5. A further drop could drive the pair toward the next significant support level at 140.25.
On the upside, the USD/JPY pair could encounter immediate resistance around the nine-day Exponential Moving Average (EMA) at 147.41. If the pair breaks above this level, it might target the 50-day EMA at 152.54 and potentially test the resistance level at 154.50, which has transitioned from previous support to current resistance.
USD/JPY: Daily Chart
Japanese Yen PRICE Today
The table below shows the percentage change of Japanese Yen (JPY) against listed major currencies today. Japanese Yen was the weakest against the Swiss Franc.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.08% | -0.03% | 0.04% | -0.09% | 0.12% | -0.56% | -0.26% | |
| EUR | -0.08% | -0.12% | -0.02% | -0.16% | 0.06% | -0.33% | -0.35% | |
| GBP | 0.03% | 0.12% | 0.10% | -0.04% | 0.19% | -0.22% | -0.25% | |
| JPY | -0.04% | 0.02% | -0.10% | -0.12% | 0.08% | -0.31% | -0.33% | |
| CAD | 0.09% | 0.16% | 0.04% | 0.12% | 0.20% | -0.17% | -0.21% | |
| AUD | -0.12% | -0.06% | -0.19% | -0.08% | -0.20% | -0.39% | -0.43% | |
| NZD | 0.56% | 0.33% | 0.22% | 0.31% | 0.17% | 0.39% | -0.04% | |
| CHF | 0.26% | 0.35% | 0.25% | 0.33% | 0.21% | 0.43% | 0.04% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Japanese Yen from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent JPY (base)/USD (quote).
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.
The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.
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