- The Japanese yen continues its rally into the weekend on the potential for divergent monetary policy.
- The BoJ has begun to normalize policy as other central banks near the end of their tightening cycles.
- USD/JPY falls sharply after Miss Nonfarm Payrolls cast doubt on further Fed rate hikes.
The Japanese yen (JPY) closed higher against the US dollar on Friday. USD/JPY closed at 149.28, down 116 pips for the day. The pair was still above its intraday low of 149.18.
Nonfarm Payrolls (NFP) for October gained 150,000 on Friday, much less than expected and causing the dollar to weaken. US Treasury yields fell sharply NFP printing.
The yen is trading higher on most pairs at the end of the week after recovering from oversold conditions following Tuesday’s dramatic sell-off by the Bank of Japan (BoJ). The yen may benefit from the market view that the BoJ will eventually normalize its ultra-loose monetary policy at a time when most other central banks are expected to end their tightening cycles.
Persistently negative interest rates in Japan have kept it weak against other currencies whose central banks have been raising interest rates to fight inflation. Investors tend to park their capital where it can show the highest risk-free returns, putting them at a serious disadvantage. With most major central banks now at maximum interest rates, the tide could turn if the BoJ starts to tighten.
At the BoJ’s last meeting, the board of governors took the first step toward policy tightening or normalization when it loosened the cap on 10-year Japanese government bond (JGB) yields, essentially a form of quantitative easing.
However, the reason it was still sold off just after the meeting was that Bank of Japan Governor Kazuo Ueda noted that most of the inflation was still coming from higher commodity prices rather than increased demand, suggesting Combat will have to keep interest rates lower for longer.
Daily overview of market movements: Yen recovers from divergent monetary policy outlook
- The yen continues to rally against most majors heading into the weekend as market sentiment sees the potential for policy divergence between the BoJ and other major central banks.
- The BoJ could start raising rates at a time when other central banks are reaching their maximum interest rates or cutting them, providing the perfect monetary policy differential for a period of dramatic strengthening of the Japanese currency.
- It’s only gaining the most against the US dollar (USD) on Friday after the release of the October Nonfarm Payrolls report sent traders bearish on the greenback.
- The report shows most job indicators weakened in October, adding further weight to the view that the Federal Reserve (Fed) is now done raising interest rates.
- Payrolls alone rose by just 150,000 versus the forecast of 180,000 and well below the previous month’s 297,000 (itself revised up from 336,000).
- Average earnings rose just 0.2% month-on-month versus an expected 0.3%, Average hours worked per week fell to 34.3 from 34.4 and the unemployment rate rose to 3.9% from an expected 3.8% and as previously.
- The yen is held back by a lack of demand driven inflation. BoJ Governor Ueda said inflation is mainly driven by rising input costs due to higher commodity prices, particularly oil, rather than “demand”.
- His comments suggest the BoJ will need to continue to keep monetary policy loose for longer than expected to fuel the economy before it starts raising rates.
- The yen is further hampered by the disconnect between the BoJ’s actions and its rhetoric. Despite changing the 1.0% JGB yield limit to a reference point for intervention rather than a fixed ceiling, the BoJ still intervened midweek to limit rising yields as they moved closer to the 1.0% mark, essentially continuing to treat the level as with a ceiling, according to a Reuters report.
Japanese yen technical analysis: USD/JPY short-term uptrend threatens to reverse
USD/JPY — the amount of yen that one dollar buys — fell after the release of lackluster Nonfarm Payrolls led to a mass abandonment of the dollar.
In the short term, the decline brings the pair dangerously close to a trend reversal. A break below the October 30 low of 148.80 would provide much stronger evidence that the bears have finally turned the tables on the bulls, as it is the last major lower high of the short-term uptrend.
US Dollar vs Japanese Yen: 4 Hour Chart
There are other signs of weakness: the pair has cleanly broken the ascending channel it was in – the second time this week it has failed to respect the lower boundary.
It broke right through the 50 and 100-4 hour simple moving average (SMA) and is struggling with 200.
US Dollar vs Japanese Yen: Daily Chart
On the daily chart, which measures the medium-term trend, the uptrend still looks solid, barring a channel break. The 148.80 low is still a level to watch and unless it is broken, the bulls will continue to hold hope for a recovery. Beyond that, another major support level is the 50-day SMA at 148.63.
The Moving Average Convergence Indicator (MACD) has been showing a bearish divergence for some time now, as it declined during the last days of October while the price rose. However, this alone is not enough to reverse the medium-term uptrend.
Ultimately, “the trend is your friend…” as the saying goes, and for USD/JPY, the short, medium and long-term trends are still bullish, suggesting that the odds will ultimately continue to favor more upside.
If the 2022 32-year high of 151.93 is broken, the uptrend will be reconfirmed and further targets are expected to be met at round number markers – 153.00, 154.00, 155.00, etc.
Frequently asked questions about the US dollar
The United States dollar (USD) is the official currency of the United States of America and the “de facto” currency of a large number of other countries where it circulates alongside local banknotes. It is the most traded currency in the world, accounting for more than 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
After World War II, the USD took over from the British pound as the world’s reserve currency. For most of its history, the US dollar was backed by gold, until the Bretton Woods Agreement in 1971, when the gold standard was abolished.
The most important factor affecting the value of the US dollar is monetary policy, which is shaped by the Federal Reserve System (Fed). The Fed has two mandates: to achieve price stability (control inflation) and to promote full employment. Its primary tool to achieve these two goals is the adjustment of interest rates.
When prices rise too fast and inflation is above the Fed’s 2% target, the Fed will raise rates, helping the value of the USD. When inflation falls below 2% or the unemployment rate is too high, the Fed can cut interest rates, weighing on the dollar.
In extreme situations, the Federal Reserve can also print more dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a troubled financial system.
This is a non-standard policy measure used when credit has dried up because banks will not lend to each other (for fear of counterparty default). It is a last resort when simply cutting interest rates is unlikely to achieve the desired result. It was the Fed’s weapon in fighting the credit crunch that occurred during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, mostly from financial institutions. QE usually leads to a weaker US dollar.
Quantitative tightening (QT) is the reverse process where the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of the bonds it holds into new purchases. It is usually positive for the US dollar.