USD/JPY trades with mild losses near 147.00 ahead of US PPI data
|- USD/JPY drifts lower to around 147.10 in Tuesday’s early Asian session.
- The rising geopolitical risks in the Middle East continue to support the JPY.
- The US Producer Price Index (PPI) for July will be in the spotlight on Tuesday.
The USD/JPY pair weakens to near 147.10 during the early Asian session on Tuesday. The modest decline of the US Dollar (USD) drags the pair lower on the day. The expectation that the US Federal Reserve (Fed) will cut the interest rate in September continues to weigh on the Greenback in the near term.
Traders ease back on bets of a double-cut in September, according to the CME’s FedWatch Tool. The markets are now pricing in less than 50% chance of a 50 basis points (bps) cut on September 18, down from 70% last week. However, the rate markets are still pricing in a 100% possibility of at least a 25 bps cut at the Fed September meeting.
The US Producer Price Index (PPI), which is due on Tuesday, could offer some hints about the Fed's outlook for rates. The PPI is expected to ease to 2.3% YoY in July from 2.6%, while the Core PPI is projected to drop to 2.7% YoY in July from the previous reading of 3.0%. The hotter PPI could diminish rate cut expectations and cap the downside for the USD.
On the other hand, the ongoing geopolitical risks in the Middle East might boost the safe-haven flows, benefiting the Japanese Yen (JPY). The Israeli intelligence community believed that Iran has decided to attack Israel directly and may do so within days in retaliation for the assassination of Hamas leader Ismail Haniyeh in Tehran in late July.
Elsewhere, the Japanese PPI came in at 3.0% YoY in July, compared to the previous reading of 2.9%, in line with the market consensus. On a monthly basis, the PPI rose 0.3% in July versus 0.2% prior.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, 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 stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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