Japanese Yen flat with traders sidelined on BoJ bond talks
- The Japanese Yen trades sideways, holding above 160.00 against the US Dollar.
- The BoJ is holding consultation rounds with bond market participants.
- The US Dollar Index hovers around 105.00, with French election euphoria fading fast.
The Japanese Yen (JPY) is afloat and moves sideways above 160.00 against the US Dollar (USD) on Tuesday. Traders are staying out of the Japanese Yen, as the Bank of Japan (BoJ) is holding a consultation round with several bond market participants. The BoJ is exploring ways to best reduce or end its bond-buying program to close off over a decade of a very loose monetary policy regime.
Meanwhile, the US Dollar Index (DXY) – which gauges the value of the US Dollar against a basket of six foreign currencies – took a minor hit on Monday, with markets applauding the outcome of the second round of French elections. With a gridlock verdict regarding government formation, the sigh of relief in markets is fading fast as eyes shift to Capitol Hill, where US Federal Reserve (Fed) Chairman Jerome Powell will testify about the semiannual Monetary Policy Report to the US Congress in Washington. Although nothing new is expected, a chance for any dovish openings or hints toward a September interest rate cut could move markets.
Daily digest market movers: BoJ consults bond traders
- A heat wave in Japan is squeezing the energy grid to its maximum capacity. In Tokyo, regulators are monitoring the situation, industry minister Ken Saito said in a regular briefing on Tuesday, according to Bloomberg.
- The Bank of Japan survey round with bond market participants reveals a wide range of options for bond-cutting, ranging from zero over 2-3 trillion yen to a maximum of 4 million yen in buybacks.
- Japanese equities have had a field day this Tuesday, soaring nearly 1% in both the Topix and the Nikkei. European equities are struggling, while US futures are in the green.
- The CME Fedwatch Tool is broadly backing a rate cut in September despite recent comments from Fed officials. The odds now stand at 73.6% for a 25-basis-point cut. A rate pause stands at a 22.9% chance, while a 50-basis-point rate cut has a slim 3.5% possibility.
- The Overnight indexed Swap curve for Japan shows a 60.1% chance of a rate hike on July 31 and a 35.2% chance for a hike on September 20.
- The US 10-year benchmark rate trades at the lower end of this week’s range near 4.29%.
- The benchmark 10-year Japan Treasury Note (JGB) trades around 1.09%, just a touch away from a fresh high for this week.
USD/JPY Technical Analysis: Holding for now
The Japanese Yen has not been able to use the momentum from late last week after a very soft retreat towards 160.00 against the US Dollar, just enough to push the Relative Strength Index (RSI) out of the overbought area. With the BoJ stepping up its consultations with bond market participants, pressure is building towards the end of July for a rate hike.
On the downside, the pivotal level near 160.32 is working as support and triggered a bounce on Monday. On the upside, 162.00 remains the level to beat before printing again a fresh multi-decade high. In case the bounce fails and starts to test the pivotal support at 160.32 again, a slide lower towards the 55-day Simple Moving Average (SMA) at 157.37 will be the first support to watch on the downside.
USD/JPY Daily Chart
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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