The Japanese yen staged a strong recovery today from its lowest level against the US dollar since October 1986 during Monday’s morning trading session, rising approximately 500 points from levels just below the key 160.00 level.
From my perspective, the sharp rebound during the day could be attributed to some intervention by Japanese authorities to support the local currency, although no official announcement has been made so far. Alongside the modest decline in the US dollar.
Therefore, I believe any clear and sustainable movement for the Japanese yen to rise still seems out of reach in the wake of the cautious approach taken by the Bank of Japan (BoJ) towards further policy tightening and uncertain interest rate outlooks.
Conversely, the Federal Reserve is expected to delay interest rate cuts following continued inflation, supported by the release of the Personal Consumption Expenditures (PCE) Price Index on Friday.
This, in turn, suggests that the wide interest rate gap between the United States and Japan will remain for some time, alongside a generally positive risk tone, which could mitigate the strength of the Japanese yen.
Recently, the Bank of Japan left short-term interest rates unchanged on Friday and indicated that inflation is on track to reach the 2% target in the coming years, indicating its readiness to raise interest rates later this year.
In the press conference following the meeting, Bank of Japan Governor Kozo Oda provided little evidence of the timing of the next interest rate hike and ruled out a complete shift to bond purchase reductions, warranting caution for those betting on the sustainability of the Japanese yen’s rise.
The Consumer Price Index in Tokyo, released on Friday, also indicated a decline in inflation in Japan, along with a generally positive tone in stock markets, which could limit any sustainable rise in the Japanese yen as a haven.
Additionally, US data showed that the Personal Consumption Expenditures Price Index rose by 0.3% in March, while the annual rate rose to 2.7% from 2.5% in February, surpassing estimates of 2.6%. Furthermore, the core Personal Consumption Expenditures Price Index, which excludes volatile food and energy prices, remained steady at a rate of 2.8% every year compared to an expected 2.6%, reaffirming expectations that the Federal Reserve will keep interest rates higher for longer, supporting the strength of the dollar in the long and medium term.
Investors are now awaiting the key event this week, which is the two-day Federal Open Market Committee (FOMC) policy meeting on Tuesday and Wednesday, and the highly anticipated US Non-Farm Payrolls (NFP) report for directional momentum.
Ultimately, I believe that while the Ministry of Finance in Japan may have intervened in the currency markets, the impact was only temporary. Despite initial selling pressure on the dollar against the yen reaching $155, the pair quickly rebounded to levels seen before the Bank of Japan’s decision before settling near $155 levels.
From my perspective, the fundamental drivers for the US dollar against the Japanese yen are largely unchanged. The pair remains highly sensitive to movements in US 10-year bond yields, which still favor the dollar in the short and medium term.
Japan faces multifaceted challenges regarding its monetary policy and financial position. While there may not be clear measures to stabilize the yen exchange rate and set a cap on bond yields simultaneously, the immense debt burdens facing Japan complicate its policy choices. A significant rise in Japanese government bond yields for 10 years could lead to a financial crisis, given the government’s heavy reliance on borrowing to service its debt.
I believe achieving a balance between managing the yen exchange rate and maintaining stability in bond yields represents a delicate balance for Japanese policymakers. The high levels of debt in the country pose a significant hurdle, requiring precise guidance to avoid economic disruptions, which overall weakens the yen’s strength.
Technical analysis of (USD/JPY) prices
From a technical perspective, Friday’s breakout through the upward-sloping trend channel extending from the year’s low served as a new catalyst for further upward movement. However, the Relative Strength Index (RSI) on the daily chart indicates the beginning of an exit from overbought conditions, justifying today’s sharp decline in the pair on Monday morning.
Nevertheless, any decline in the medium or near term is likely to find strong support near the 154.85 level, which represents a confirmation point of breaking the resistance of the upward channel at 157.00, a key pivotal point. Breaking this level would shift the bias in the short term in favor of further decline, potentially extending to a deep correction that could reach 154.85 as a major support level.
USD/JPY – Prices Chart –-XS.com MT4.
Furthermore, momentum surpassing levels of 157.00 can be considered a new catalyst for a return to upward movement, supporting the likelihood of further gains. However, the exit of the Relative Strength Index (RSI) from the overbought zone on the daily chart makes it wise to await some consolidation in the short term or further corrective retracement before entering new positions for the next wave of positive movement for the pair.
At the same time, any corrective decline in the USD/JPY pair below the 157.00 level will now find strong support near the 155.35-155.30 zone. This is followed by major support at 154.85, and a breakthrough below it could push the price down to 154.00 on its way to last Friday’s low around the 153.60-153.55 zone.
Support Levels: 154.85 – 152.90 – 150.95
Resistance Levels: 157.40 – 159.30 – 160.50
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