The Japanese Yen (JPY) recovers slightly from the lowest level since August, touched against its American counterpart earlier this Monday, though maintains its heavily offered tone through the first half of the European session. The outcome of Japan’s ruling Liberal Democratic Party (LDP) leadership election, which positions Sanae Takaichi to become the first female Prime Minister, could Bank of Japan’s (BoJ) task. In fact, Takaichi is expected to oppose any further monetary tightening by the BoJ. This, along with the prevalent risk-on environment, turns out to be a key factor weighing heavily on the JPY at the start of a new week.
Meanwhile, a sharp weakening in the JPY provides a goodish lift to the US Dollar (USD) and pushes the USD/JPY pair closer to the 150.00 psychological mark, or the highest level since August touched earlier this month. The upside for the USD, however, remains capped in the wake of concerns that a prolonged US government shutdown could impact the US economic performance and bets that the US Federal Reserve (Fed) will cut rates two more times this year. The latter marks a significant divergence in comparison to expectations for an imminent BoJ rate hike early next year, which, in turn, caps gains for the USD/JPY pair.
Japanese Yen bears retain control as Takaichi’s win dims BoJ rate hike bets
- Sanae Takaichi was elected as the leader of the Liberal Democratic Party (LDP) in a run-off election held on Saturday and is now expected to be confirmed as Japan’s first female Prime Minister during a parliamentary session in mid-October. Takaichi stood out in the race as the only proponent of big spending and loose monetary policy.
- Expectations for more expansionary economic policies could complicate the Bank of Japan’s task and also seem to have raised the chances that the central bank will avoid raising interest rates this month. The optimism lifts Japan’s Nikkei 225 to a fresh record high and weighs heavily on the Japanese Yen during the Asian session on Monday.
- Meanwhile, BoJ Governor Kazuo Ueda reiterated last week that the central bank will raise interest rates if the economy and prices move in line with forecasts. Moreover, markets are fully pricing in another rate increase by the BoJ early next year, which might continue to offer some support to the JPY and help limit deeper losses.
- The BoJ’s hawkish stance marks a significant divergence in comparison to rising bets that the US Federal Reserve (Fed) will lower borrowing costs in October and in December. Adding to this, concerns about the economic impact of a US government shutdown might keep a lid on any further USD appreciation and cap the USD/JPY pair.
- Important US macro releases scheduled at the start of a new month have been delayed due to the government closure, leaving the USD at the mercy of speeches from influential FOMC members. This, along with the broader risk sentiment, could drive the USD/JPY pair ahead of Japan’s Household Spending data due for release on Tuesday.
USD/JPY finds acceptance above 150.00 and seems poised to appreciate further
From a technical perspective, last week’s bounce from the 100-day Simple Moving Average (SMA) and a subsequent move up beyond the 150.00 round figure will be seen as a fresh trigger for the USD/JPY bulls. Given that oscillators on the daily chart have again started gaining positive traction, spot prices might then aim to test the August monthly swing high, around the 151.00 neighborhood, with some intermediate resistance near the 150.65-150.70 region.
On the flip side, any corrective slide below the 149.40 immediate support could be seen as a buying opportunity and remain limited near the Asian session low, around the 149.00 mark. A convincing break below the latter could drag the USD/JPY pair to the next relevant support near the 148.35 region en route to the 148.00 round figure and the 147.80 zone, which, if broken, might shift the near-term bias in favor of bearish traders.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, 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 went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
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 stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.