- The Japanese Yen rallies to a fresh multi-month peak against the USD on Thursday.
- Hopes for a BoJ pivotl boost the JPY and drag USD/JPY closer to sub-141.00 levels.
- The USD stalls the post-FOMC downfall and lends support amid the risk-on mood.
The Japanese Yen (JPY) trims a part of its strong intraday gains against the US Dollar (USD) and assists the USD/JPY pair to stage a goodish recovery from sub-141.00 levels, or a fresh multi-month low touched earlier this Thursday. The prevalent risk-on mood, bolstered by the Federal Reserve's (Fed) dovish shift and hopes for additional stimulus from China, turns out to be a key factor undermining the safe-haven JPY amid extremely overstretched conditions on hourly charts. That said, growing acceptance that the Bank of Japan (BoJ) may exit its negative rate policy sooner than anticipated, even before the results of labor talks at large companies are known, might continue to lend support to the JPY.
Apart from this, a modest USD recovery lifts the USD/JPY pair closer to the 142.00 mark during the early European session on Thursday. Meanwhile, the US central bank flagged the end of its policy-tightening campaign at the end of December policy meeting on Wednesday and pencilled in at least three 25 basis points rate cuts in 2024. This leads to a further decline in the US Treasury bond yields, resulting in the narrowing of the US-Japan rate differential and suggesting that the path of least resistance for the JPY is to the upside. This, in turn, warrants some caution before confirming that the USD/JPY pair has formed a near-term bottom and positioning for any meaningful appreciating move.
Daily Digest Market Movers: Japanese Yen remains on the front foot amid hopes for a BoJ pivot
- Expectations for an imminent shift in the BoJ's policy stance boost the Japanese Yen, which, along with the post-FOMC US Dollar selling bias, drags the USD/JPY pair closer to the 142.00 mark during the Asian session on Thursday.
- A piece in Japanese media suggests that the Bank of Japan might be unwilling to go in the opposite direction if central banks in the US and Europe place rate cuts on the table and decide to exit negative rates between January and March.
- The Federal Reserve left the policy rate unchanged at 5.25%-5.50% range at the end of a two-day meeting on Wednesday and also acknowledged that inflation has eased, implying that interest rate increases have come to an end.
- Earlier in the day, data from the US showed that the Producer Price Index (PPI) remained unchanged in November, providing further evidence that inflation continues to meander down toward the Fed's average annual 2% target.
- The Fed's updated economic projections, which included the so-called "dot plot", signalled that lower borrowing costs are on the cards and now expect interest rates to fall to 4.6%, suggesting a cumulative 0.75% rate cut next year.
- In the post-meeting press conference, Fed Chair Jerome Powell said that the central bank is not likely to hike further and that it is very focused on not making the mistake of keeping rates too high for too long.
- The yield on the benchmark 10-year US government bond touched its lowest level since August after the Fed decision, while the two-year US Treasury yield, which reflects rate expectations, tumbled to its weakest level since early July.
- Data released this Thursday showed that Japan Machinery Orders, which is seen as a leading indicator of capital spending in the coming six to nine months, rose 0.7% in October, beating consensus estimates for a modest decline.
- Japanese Prime Minister Fumio Kishida set about replacing key cabinet members at the centre of a financial probe on Thursday, battling to control the damage from one of the biggest scandals in decades.
- Four ministers and several deputy ministers are set to go, local news outlets have reported, in the embattled premier's third cabinet overhaul since he came to office just over two years ago.
- Prosecutors have launched a criminal probe into the faction, and will start questioning dozens of lawmakers for allegations of about 500 million Yen in total of fundraising proceeds missing from official party accounts.
- Japan's ruling Liberal Democratic Party has agreed on income tax breaks aimed at offsetting the pain of price hikes on households to help change decades of deflationary mindset.
- Traders now look to the latest monetary policy updates by major central banks in Europe for short-term opportunities ahead of the US monthly Retail Sales, expected to fall for the second successive month, by 0.1% in November.
Technical Analysis: USD/JPY bears take breather amid oversold conditions, not out of the woods yet
From a technical perspective, acceptance below the very important 200-day Simple Moving Average (SMA) and a subsequent breakdown through the 142.00 mark is seen as a fresh trigger for bearish traders. Some follow-through selling below the 141.00 mark has the potential to drag the USD/JPY pair further towards the 140.40 intermediate support en route to the 140.00 psychological mark. Meanwhile, the Relative Strength Index (RSI) on the daily chart is already flashing oversold conditions and warrants caution for bearish traders. This makes it prudent to wait for some near-term consolidation or a modest bounce before positioning for an extension of the recent sharp pullback from the 152.00 neighbourhood, or the YTD peak touched in November.
That said. attempted recovery moves might now confront stiff resistance near the 142.00 round figure. Any further move up is likely to attract fresh sellers and remain capped near the 143.00 mark. A sustained strength beyond the latter, however, could trigger a short-covering rally and lift the USD/JPY pair to the 144.00 mark, which should act as a key pivotal point. Some follow-through buying should pave the way for a further appreciating move, towards the 145.00 psychological mark before spot prices climb to the 145.50-145.60 resistance and the 146.00 round figure.
Japanese Yen price this week
The table below shows the percentage change of Japanese Yen (JPY) against listed major currencies this week. Japanese Yen was the strongest against the US Dollar.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | -1.23% | -0.72% | -0.75% | -1.87% | -1.88% | -1.51% | -1.22% | |
| EUR | 1.22% | 0.52% | 0.48% | -0.63% | -0.64% | -0.29% | 0.01% | |
| GBP | 0.72% | -0.52% | -0.03% | -1.15% | -1.16% | -0.79% | -0.50% | |
| CAD | 0.75% | -0.48% | 0.02% | -1.12% | -1.12% | -0.75% | -0.47% | |
| AUD | 1.83% | 0.63% | 1.13% | 1.10% | -0.01% | 0.36% | 0.64% | |
| JPY | 1.85% | 0.64% | 1.05% | 1.11% | 0.01% | 0.36% | 0.65% | |
| NZD | 1.49% | 0.27% | 0.78% | 0.75% | -0.36% | -0.37% | 0.29% | |
| CHF | 1.19% | -0.02% | 0.48% | 0.45% | -0.66% | -0.67% | -0.30% |
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 Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
Risk sentiment FAQs
What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?
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.
What are the key assets to track to understand risk sentiment dynamics?
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.
Which currencies strengthen when sentiment is "risk-on"?
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.
Which currencies strengthen when sentiment is "risk-off"?
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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