The Japanese yen continued its strong downward trend this week, reaching its lowest level in over 40 years. The USD/JPY crossed the crucial resistance of 162, bringing its 12-month gains to 12.3%.
BoJ prepares response to the weaker yen
The USD/JPY pair continued its recent upward trend this week as the US Dollar Index (DXY) rose modestly.
After falling for three consecutive days, the index rebounded to 101.31.
The Japanese yen has slumped mostly because of the ongoing interest rate differentials between the US and Japan.
The Federal Reserve has moved interest rates to between 3.50% and 3.75%, with officials hinting that they will hike this year if inflation remains stubbornly high.
Recent data showed that the headline CPI has remained above the Fed’s 2% target in the past five years, putting more pressure on Kevin Warsh.
The Bank of Japan, on the other hand, hiked interest rates to 1% in the last meeting to contain inflation. Despite this hike, the interest rate differential between the US and Japan remains substantially high, making the dollar more attractive.
Traders are now waiting for a potential response from the BoJ. In a statement, Satsuki Katayama, the country’s finance minister, said that an appropriate decision will be made.
It is unclear what options the BoJ has to boost the value of the Japanese yen. For one, it has already pumped over $73 billion to buy the currency this year. While the intervention in April was effective, the Japanese yen weakened after that.
The bank can decide to deliver more interest rate hikes to make the yen more attractive.
Such a move, however, will boost the government’s interest payments substantially since Japan has one of the largest public debt loads in the world.
Key Japan and US data ahead
There will be some key catalysts to watch ahead. Japan will publish the quarterly Tankan survey data on Wednesday, which will shed more light on the state of the economy.
The other key data to watch will be from the United States, where the Bureau of Labor Statistics (BLS) will publish the latest non-farm payrolls (NFP) report. Economists expect the data to show that the economy added over 114k jobs last month as the unemployment rate remained at 4.3%.
A strong jobs report will mean that the Fed will have a justification for hiking interest rates later this year, which will boost the US dollar against the Japanese yen.
The other key USD/JPY news will come from Portugal, where the European Central Bank (ECB) is hosting its annual conference. Fed’s Kevin Warsh and BoJ’s Kazuo Ueda will provide a preview of what to expect.
USD/JPY technical analysis
USDJPY chart | Source: TradingView
The daily chart shows that the USD/JPY pair has been in a strong uptrend in the past few months and is now trading at its highest point in over 40 years. It has remained above all moving averages, which have provided it with substantial support.
On the other hand, the pair has formed a rising wedge pattern, which is made up of two ascending and converging trends. This pattern normally leads to a bearish breakout over time. As such, there is a possibility that the pair will dive in the coming days as sellers target the key support of 160. This will happen if the BoJ launches some intervention.
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