The Japanese Yen (JPY) remains on the front foot against its American counterpart through the Asian session on Tuesday amid speculations that authorities would step in to stem further weakness in the domestic currency. Apart from this, mixed signals from Federal Reserve (Fed) officials keep the US Dollar (USD) depressed below its highest level since late May, which turns out to be another factor exerting some pressure on the USD/JPY pair.
Meanwhile, Japan’s ailing fiscal position and the uncertainty over the Bank of Japan’s (BoJ) policy tightening path hold back the JPY bulls from placing aggressive bets. Adding to this, a positive risk tone might contribute to capping the upside for the safe-haven JPY. Traders also opt to wait for this week’s key US macro releases, starting with the Producer Price Index (PPI) and Retail Sales on Tuesday, before positioning for the next leg of a directional move.
Japanese Yen struggles to attract any meaningful buyers despite growing intervention fears
- Japan’s Finance Minister Satsuki Katayama, in the strongest warning to date, said on Friday that we will take appropriate action as needed against excess volatility and disorderly market moves, and also signaled chances of intervention. Furthermore, Takuji Aida, a member of a key government panel, said on Sunday that Japan can actively intervene in the currency market to mitigate the negative economic impact of a weak JPY.
- Japan’s cabinet approved a lavish ¥21.3 trillion economic stimulus package last week – the biggest since COVID-19 – and further amplified concerns about the nation’s worsening fiscal position. The cabinet plans to approve a supplementary budget to fund the package as early as November 28. This fuels worries about the supply of new government debt and lifted the yield on super-long Japanese government bonds to a record high.
- Moreover, data released last week showed that Japan’s economy contracted in Q3 for the first time in six quarters, which could put pressure on the Bank of Japan to delay raising interest rates. However, BoJ Governor Kazuo Ueda left the door open for a December rate hike and told the parliament that a weak JPY could push up broader prices. Inflation in Japan has remained above the BoJ’s 2% target for well over three years.
- In contrast, US Federal Reserve Governor Christopher Waller said on Monday that available data showed the US job market remains weak enough to warrant another quarter-point rate cut at the December policy meeting. This follows New York Fed President John Williams’ remarks last Friday, describing the current policy as modestly restrictive and saying that the central bank can still cut interest rates in the near term.
- Traders were quick to react and are now pricing in around 80% chances that the Fed will lower borrowing costs at the end of a two-day meeting on December 10. This, in turn, keeps a lid on the recent US Dollar rally to its highest level since late May and acts as a headwind for the USD/JPY pair. The fundamental backdrop, however, seems tilted in favor of the JPY bears and backs the case for further upside for the currency pair.
- Investors now look forward to the delayed release of the US Producer Price Index (PPI) and monthly Retail Sales figures, due later during the North American session. Tuesday’s US economic docket also features the release of Pending Home Sales and Richmond Manufacturing Index. This, in turn, will play a key role in influencing the USD price dynamics and producing short-term trading opportunities around the USD/JPY pair.
USD/JPY could find decent support and attract dip-buyers near the 156.25-156.20 region
From a technical perspective, traders might now wait for acceptance above the 157.00 mark before placing fresh bullish bets around the USD/JPY pair. The subsequent move up could lift spot prices to the 157.45-157.50 intermediate hurdle en route to the 157.85-157.90 region, or a ten-month peak touched last week. Some follow-through buying beyond the 158.00 round figure will mark a fresh breakout and pave the way for a further near-term appreciating move.
On the flip side, any meaningful corrective slide might now find some support near the 156.25-156.20 zone. This is followed by the 156.00 mark, below which the USD/JPY pair could fall to the 155.45-155.40 intermediate support before dropping to the 155.00 psychological mark. Any further decline is more likely to find decent support and attract buyers near the 154.50-154.45 horizontal resistance breakpoint, which could act as a key pivotal point and a strong near-term base.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.