Japanese Yen strengthens with markets at ease on US Holiday

The Japanese Yen gains against the Greenback while US markets are closed.
30-year bond auction went smoothly despite concerns about the end of bond buying.
The US Dollar Index took a hit on easing US economic data and traders softer, just above 105.00

The Japanese Yen (JPY) strengthens to around 161.00 against the US Dollar (USD) on Thursday while the US markets are closed for a public holiday. The move comes after a 30-year sovereign Japanese bond auction went extremely smoothly, while markets were concerned the government would have issues allocating it, with traders still concerned about the Bank of Japan (BoJ) ending its bond-buying program. Some positive news thus for the Japanese Yen which is trading higher against the US Dollar.

Meanwhile, the US Dollar Index (DXY) – which gauges the value of the US Dollar against a basket of six foreign currencies – took a hit on Wednesday with a very packed economic data calendar.. The main takeaway from all data was that nearly every data point came in a softer or below consensus view, which points to the US economy starting to slow down.

Daily digest market movers: Intervention risk lingering

Bloomberg reports on a piece from RBC BlueBay Asset Management that sees a risk that the Bank of Japan could announce a bigger reduction in its bond purchases than markets expect. Add in there another rate hike, and a double whammy of hawkish forces could trigger a firmly higher Japanese Yen.
Swap traders see swap rates on forward contracts swing higher, pointing to a higher possibility for another rate hike on July 31. The surge in swap points started on June 18, when Governor Kazuo Ueda alluded that another rate hike is in the cards.
Equities are in the green across the board, led by the Japanese Topix and Nikkei 225, which both closed just below 1%. European and US equities are doing well despite lower volumes out of the US.
The CME Fedwatch Tool is broadly backing a rate cut in September despite recent comments from Fed officials. The odds now stand at 67.3% for a 25-basis-point cut. A rate pause stands at a 26.5% chance, while a 50-basis-point rate cut has a slim 6.2% possibility.
The Overnight indexed Swap curve for Japan shows a 48.2% chance of a rate hike on July 31, and a smaller 39.8% chance for a hike on September 20.
The US 10-year benchmark rate trades at the lower end of this week’s range near 4.36%, and will remain there as the US bond markets are closed on Thursday.
The benchmark 10-year Japan Treasury Note (JGB) trades around 1.08%, easing from the daily high of 1.097%.

USD/JPY Technical Analysis: BoJ bailing out

The USD/JPY still has that sword of Damocles hanging over it, with that possible intervention from the Japanese Ministry of Finance. However, the research paper Bloomberg picked up from RBC might be an alternative approach. Should the Bank of Japan announce that it is hiking interest rates, while trimming or even completely closing down its bond buying program, markets would go cold-turkey on the double hawkish intervention. JPY would rally firmly across the board while yields would be spiking higher, and would see USD/JPY fall through the floor.

With the Relative Strength Index (RSI) now firmly overbought in the daily chart, a correction looks to be imminent. First support at 160.32 would already be a key level. Should that level breaks, a nosedive move would be inevitable with USD/JPY heading to either 157.03 (55-day Simple Moving Average) or the 100-day SMA at 154.26.

USD/JPY Daily Chart

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

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.

How does broader risk sentiment impact 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.

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.