- The Japanese Yen scales higher against a weaker USD for the third straight day on Monday.
- The divergent BoJ-Fed policy expectations and reviving safe-haven demand benefited the JPY.
- Hopes for a US-Japan trade deal further support the JPY and weigh on the USD/JPY pair.
The Japanese Yen (JPY) continues with its relative outperformance against a weaker US Dollar (USD) and drags the USD/JPY pair to the 143.00 neighborhood, or a multi-day low heading into the European session on Monday. The growing acceptance that the Bank of Japan (BoJ) will hike interest rates again this year turns out to be a key factor underpinning the JPY. Furthermore, hopes that Japan will strike a trade deal with the US provide an additional boost to the JPY.
Meanwhile, persistent uncertainties surrounding US President Donald Trump’s trade policies and rising geopolitical tensions temper investors’ appetite for riskier assets, which further benefits the JPY’s safe-haven status. The USD, on the other hand, is weighed down by bets that the Federal Reserve (Fed) will lower borrowing costs further. This marks a bid divergence in comparison to hawkish BoJ expectations and supports prospects for further near-term JPY appreciation.
Japanese Yen bulls retain control amid BoJ rate hike bets and safe-haven flows
- The Tokyo Consumer Price Index (CPI) has exceeded the Bank of Japan’s 2% target for three straight years and pointed to sticky food inflation on Friday. This could add pressure on the BoJ to hike interest rates again, which continues to underpin demand for the Japanese Yen.,
- Japan’s top trade negotiator Ryosei Akazawa said the latest round of discussions with the Trump administration on tariffs have put them on track toward a trade deal as early as this month. Akazawa added that the two sides will meet again before the Group of Seven leaders’ summit.
- US President Donald Trump said on Friday that he is going to double tariffs on steel imports from 25% to 50%. Earlier Trump lashed out at China, saying that China had violated its trade deal with the US. The escalation comes after a federal appeals court reinstated Trump’s tariffs.
- Ukraine on Sunday launched one of its largest drone attacks on Russia, striking five air bases deep inside Russian territory and destroying more than 40 planes. Meanwhile, Russia pounded Ukraine with missiles and drones just hours before a new round of direct peace talks in Istanbul.
- Israel continued its relentless bombardment of the Gaza Strip, while Yemen’s Houthi rebels claimed responsibility for a ballistic missile attack, which was intercepted, on Ben Gurion Airport near Tel Aviv. This keeps geopolitical risks in play and benefits the safe-haven JPY.
- Meanwhile, the US Personal Consumption Expenditure (PCE) Price Index cooled to a 2.1% YoY rate in April from 2.3% in the previous month. Moreover, the core PCE Price Index, which excludes volatile food and energy prices, rose 2.5% compared to 2.7% in March.
- The data reaffirmed expectations that the Fed will cut its target for short-term borrowing costs in September. Traders are also pricing in the possibility of a second rate cut in December. This prompts fresh US Dollar selling and further exerts pressure on the USD/JPY pair.
- Investors now look forward to this week’s important US macro releases scheduled at the beginning of a new month, starting with the ISM Manufacturing PMI later this Monday. Apart from this, Fed Chair Jerome Powell’s appearance will be looked upon for short-term impetuses.
USD/JPY could accelerate the downfall once the 143.00 mark is broken decisively
Last week’s failure near the 61.8% Fibonacci retracement level of the recent downfall from the monthly peak and a subsequent fall below the 200-period Simple Moving Average (SMA) on the 4-hour chart favors the USD/JPY bears. This, along with negative oscillators on daily/hourly charts, suggests that the path of least resistance for spot prices remains to the downside and backs prospects for deeper losses. Hence, some follow-through weakness towards the 143.00 mark, en route to the next relevant support near the 142.40 area, looks like a distinct possibility. The pair could eventually drop to the 142.10 area, or the monthly low touched last Tuesday.
On the flip side, the 200-period SMA on the 4-hour chart, currently pegged just ahead of the 144.00 round figure, might now act as an immediate strong barrier. This is closely followed by the 144.25-144.30 supply zone, above which the USD/JPY pair could aim to reclaim the 145.00 psychological mark. A sustained strength beyond the latter should pave the way for a move towards the 145.65 horizontal zone en route to the 146.00 round figure and the 146.25-146.30 region, or a two-week top touched last Thursday.
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.