The Japanese yen saw a significant recovery today, bouncing back from its lowest level against the US dollar since October 1986. The currency rose approximately 500 points from levels just below 160.00 during Monday’s morning trading session.
The rebound in the yen could be attributed to potential intervention by Japanese authorities to support the local currency. However, no official announcement has been made yet. The US dollar also experienced a modest decline, further contributing to the yen’s strength.
Despite the recovery, a sustainable rise in the Japanese yen still seems unlikely due to the cautious approach taken by the Bank of Japan towards policy tightening and uncertain interest rate outlooks. On the other hand, the Federal Reserve is expected to delay interest rate cuts, supported by continued inflation.
The wide interest rate gap between the US and Japan is expected to persist for some time, along with a generally positive risk tone. This could dampen the strength of the Japanese yen in the near term.
The Bank of Japan recently left short-term interest rates unchanged and indicated that inflation is on track to reach the 2% target in the coming years. However, the timing of the next interest rate hike remains uncertain, warranting caution for those expecting a sustained rise in the yen.
Data from Japan, including the Consumer Price Index in Tokyo, indicated a decline in inflation. Meanwhile, US data showed an increase in the Personal Consumption Expenditures Price Index, supporting expectations that the Federal Reserve will maintain higher interest rates.
Investors are eagerly awaiting the Federal Open Market Committee policy meeting and the US Non-Farm Payrolls report for directional momentum this week.
While the Ministry of Finance in Japan may have intervened in the currency markets, the impact was temporary. The fundamental drivers for the US dollar against the Japanese yen remain largely unchanged, with the pair sensitive to movements in US 10-year bond yields.
Japan faces challenges in balancing monetary policy and financial stability due to its high debt levels. Achieving a balance between managing the yen exchange rate and stabilizing bond yields is crucial for Japanese policymakers to avoid economic disruptions.
From a technical perspective, the USD/JPY pair may experience further upward movement, supported by a breakout through an upward-sloping trend channel. However, the Relative Strength Index indicates a potential correction in the short term, with strong support levels at 154.85 and 157.00.
Momentum above 157.00 could signal further gains, while a decline below this level may lead to a deeper correction towards 154.85. Support and resistance levels for the pair are crucial indicators for potential future movements.