USD/JPY rises amid falling US bond yields and risk aversion
- USD/JPY's ascent driven by a cautious market mood, with Wall Street showing mixed performance and US Dollar strength.
- Narrowing US trade deficit and business sentiment improvement overlooked as traders await key US inflation data.
- Tokyo's core inflation report suggests continued ultra-loose monetary policy by BoJ, adding context to currency dynamics.
The USD/JPY posted decent gains late in the North American session, courtesy of risk aversion as investors shrug off economic data from Japan. The major is trading at 144.55, gaining 0.23%.
The Japanese Yen fails to gain traction in a risk-off mood
Risk aversion is driving price action, as Wall Street is trading with losses in two of its three largest stock indices, down between 0.06% and 0.40%. The Nasdaq 100 is the outlier gaining 0.25%.
In the FX space, the US Dollar Index (DXY), which measures the buck’s performance against a basket of six currencies, advances 0.26%, up at 102.56 amid falling US Treasury bond yields.
Economic data in the United States (US) was mainly ignored by market participants focused on the inflation report on Thursday. Nevertheless, the US Department of Commerce revealed that November’s trade deficit narrowed less than estimates and the previous month's data. The Balance of Trade rose to $-63.2 billion, from $-64.5 in October to $-65 billion foreseen.
Earlier, the National Federation of Independent Business (NFIB) revealed the results of their Survey, which showed that business sentiment improved but remained below the 50-year average of 98, coming at 91.9 in December, above November’s 90.6. the survey highlighted that inflation is businesses' main concern.
Aside from this, core inflation in Tokyo was lower than expected and came at 2.1% YoY, from 2.3% in November, matching estimates of 2.1%. Even though there have been speculations the Bank of Japan (BoJ) would normalize monetary policy in the near-term, data suggests maintaining the ultra-loose policy, is the path to follow.
Ahead of the week, the Japanese economic docket will feature the Current Account on Thursday. On the US front, inflation data is widely expected to show a mixed print, which could pave the way for a muted reaction in the financial markets.
USD/JPY Technical Levels
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.
Author
Christian Borjon Valencia
FXStreet
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
