The Japanese Yen (JPY) moves further away from a fresh multi-month low touched against its American counterpart during the Asian session on Tuesday, though any meaningful appreciation seems elusive. The JPY bears turn cautious amid expectations that Japanese authorities might intervene to stem further weakness in the domestic currency. This, along with subdued US Dollar (USD) price action, keeps the USD/JPY pair capped near the 154.45-154.50 supply zone. However, the uncertainty surrounding the timing of the next interest rate hike by the Bank of Japan (BoJ) could act as a headwind for the JPY.
In fact, the BoJ’s Summary of Opinions, released on Monday, indicated divided views on rate hikes. Adding to this, BoJ’s Junko Nakagawa said the central bank will proceed cautiously with policy decisions. This, in turn, reinforced market expectations that the BoJ could delay raising interest rates amid bets on a large-scale stimulus package under Japan’s new Prime Minister Sanae Takaichi’s administration, and might continue to undermine the JPY. Moreover, the possibility of an end to the US government shutdown might further contribute to keeping a lid on any meaningful appreciation for the safe-haven JPY.
Japanese Yen draws some support from intervention fears; not out of the woods yet amid BoJ uncertainty
- A summary of Bank of Japan policymakers’ opinions at their October meeting, released on Monday, reflected a view that the time for another interest-rate hike is approaching. However, there was some uncertainty over the effect of new Prime Minister Sanae Takaichi’s policies on the economy and prices.
- Furthermore, several board members suggested the fallout from higher US tariffs and Japanese companies’ wage momentum as key factors in deciding the timing of the next rate hike. Adding to this, BoJ’s Junko Nakagawa warned of soft consumption and concern over the US economic outlook.
- In fact, data released last Friday indicated that existing economic conditions might be influencing household expenditure and fueling speculations that weaker private consumption could cool demand-driven inflation. This adds to the BoJ uncertainty and continues to weigh on the Japanese Yen.
- Japan’s Economy Minister Minoru Kiuchi said on Tuesday that the government is increasingly aware that elevated inflation is eroding household purchasing power and will implement measures to cushion the impact of higher prices. He added that a weak JPY continues to push up import costs and consumer prices.
- The Senate cleared a key hurdle late Sunday for a formal debate on a motion to resume funding to federal agencies and end the longest government shutdown in American history. The development provides an additional boost to investors’ sentiment and further undermines the safe-haven JPY.
- Meanwhile, the optimism pushes the US Treasury bond yields higher and assists the US Dollar (USD) to attract some buyers for the second straight day, further lending support to the USD/JPY pair. However, bets for another Federal Reserve rate cut in December could cap gains for the Greenback.
USD/JPY once again fails near the 154.45-154.50 pivotal hurdle; bullish potential seems intact
A sustained strength beyond the 154.45-154.50 horizontal barrier will be seen as a fresh trigger for the USD/JPY bulls. Given that oscillators on the daily chart are holding comfortably in positive territory and are still away from being in the overbought zone, spot prices might then aim to conquer the 155.00 psychological mark. The momentum could extend further towards the 155.60-155.65 intermediate hurdle before the currency pair eventually climbs to the 156.00 round figure.
On the flip side, any corrective pullback below the Asian session trough, around the 154.00 mark, could be seen as a buying opportunity near the 153.60-153.50 region. This should help limit the downside for the USD/JPY pair near the 153.00 round figure. A convincing break below the latter, however, could pave the way for deeper losses to the 152.15-152.10 region, which should now act as a strong near-term base for the currency pair.
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.
