Japanese Yen remains on the front foot against USD; lacks bullish conviction
|- The Japanese Yen recovers further from a two-month trough touched against the USD on Monday.
- Geopolitical tensions benefit the safe-haven JPY and exert downward pressure on the USD/JPY pair.
- The BoJ rate hike uncertainty caps gains for the JPY and should limit any further losses for the major.
The Japanese Yen (JPY) remains on the front foot against its American counterpart for the second successive day on Tuesday, albeit it lacks bullish conviction. The overnight comments by Japanese officials revived intervention fears, which, along with escalating geopolitical tensions in the Middle East, turn out to be key factors underpinning the safe-haven JPY. Apart from this, a modest US Dollar (USD) downtick exerts some downward pressure on the USD/JPY pair.
That said, diminishing odds for another interest rate hike by the Bank of Japan (BoJ) in 2024 hold back the JPY bulls from placing aggressive bets. Furthermore, investors have been scaling back their expectations for a more aggressive policy easing by the Federal Reserve (Fed). This, in turn, helps limit the USD losses and the USD/JPY pair ahead of the FOMC meeting minutes on Wednesday, which will be followed by the US inflation figures on Thursday and Friday.
Daily Digest Market Movers: Japanese Yen draws support from intevention fears, BoJ rate hike uncertainty cap gains
- Japan's Vice Finance Minister for International Affairs Atsushi Mimura warned against speculative moves in the FX market, fueling speculations that the government may intervene to support the Japanese Yen.
- Adding to this, Japan's newly appointed Finance Minister Katsunobu Kato said the government would monitor how rapid currency moves could potentially impact the economy and would take action if necessary.
- Furthermore, fears that Middle East tensions could turn into a wider conflict, which drives haven flows towards the JPY and drags the USD/JPY pair away from its highest level since August 16 touched on Monday.
- In the latest developments, Lebanon’s Hezbollah fired rockets at Israel's port city of Haifa and a military base near the central city of Tel Aviv, while Israel bombed a couple of buildings in the southern suburbs of Beirut.
- China’s state planner – the National Development and Reform Commission (NDRC) – said this Tuesday that the downward pressure on China's economy is increasing, tempering investors' appetite for riskier assets.
- The recent comments by Japan's Prime Minister Shigeru Ishiba, saying that the country is not in an environment for more rate increases, raised doubts over the Bank of Japan's ability to tighten further in the coming months.
- This, along with the uncertainty over the Japanese general elections on October 27, might act as a headwind for the JPY and offer support to the USD/JPY pair amid a short-term bullish tone around the US Dollar.
- Against the backdrop of Federal Reserve Chair Jerome Powell's hawkish remarks, the upbeat US jobs report dashed hopes for a more aggressive policy easing and kept the USD bulls elevated near a multi-week top.
- Traders now look forward to the release of the FOMC minutes on Wednesday and the key US inflation data – the consumer inflation figures and the Producer Price Index (PPI) on Thursday and Friday, respectively.
Technical Outlook: USD/JPY setup supports prospects for emergence of dip-buying, 147.00 holds the key for bulls
From a technical perspective, last week's break above the 50-day Simple Moving Average (SMA), for the first time since mid-July, and the subsequent move beyond the 38.2% Fibonacci retracement level of the July-September downfall were seen as fresh triggers for bulls. Moreover, oscillators on the daily chart have been gaining positive traction and suggest that the path of least resistance for the USD/JPY pair is to the upside. Hence, any further slide might still be seen as a buying opportunity and is more likely to remain cushioned near the 147.00 mark, which should now act as a key pivotal point.
On the flip side, a sustained move back above the 148.00 mark might prompt some technical buying and lift the USD/JPY pair to the 148.70 resistance zone en route to the 149.00 round figure. Some follow-through buying beyond the weekly top, around the 149.10-149.15 region, will reaffirm the positive outlook and allow bulls to reclaim the 150.00 psychological mark.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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