The Japanese Yen (JPY) retreats from a one-week top, touched against a broadly weaker US Dollar (USD) during the Asian session on Wednesday, though the downside seems limited. Despite reports that the Bank of Japan (BoJ) is ramping up rate hike messaging, the prospect for further policy tightening in December or January is still finely balanced. Moreover, concerns about Japan’s ailing fiscal position on the back of Prime Minister Sanae Takaichi’s pro-stimulus stance, along with the prevalent risk-on environment, turn out to be key factors undermining the safe-haven JPY.
Meanwhile, data released earlier today underscored the BoJ’s view that a tight job market will keep pushing up wages and service-sector inflation. This reinforces expectations for further BoJ policy tightening. This marks a significant divergence in comparison to the growing acceptance that the US Federal Reserve (Fed) will lower borrowing costs again in December. The latter drags the USD to a one-week low and should contribute to capping the USD/JPY pair. Traders now look to more delayed US macro data for short-term opportunities later during the North American session.
Japanese Yen turns lower as fiscal concerns and risk-on mood offset BoJ rate hike bets
- Reuters reported this Wednesday that the Bank of Japan, over the past week, has intentionally shifted messaging to highlight the inflationary risks of a persistently weak Japanese Yen, suggesting that a December rate hike remains a live option. The change followed a key meeting between Prime Minister Sanae Takaichi and BoJ Governor Kazuo Ueda last week, which appeared to remove immediate political objections to rate hikes from the new administration.
- Meanwhile, data from the BoJ showed that the Services Producer Price Index, which tracks the price companies charge each other for services, rose 2.7% in October from a year earlier. This marked a notable slowdown from a revised 3.1% increase recorded in the previous month, though it suggests that Japan was on the cusp of durably meeting its 2% inflation target. This backs the case for further BoJ policy tightening and boosts the JPY during the Asian session.
- The US Dollar (USD), on the other hand, slides to a one-week low in the aftermath of unimpressive US macro data released on Tuesday, which reaffirmed market expectations for another interest rate cut by the US Federal Reserve in December. Adding to this, Fed Governor Stephen Miran echoed the dovish view and said in a television interview on Tuesday that a deteriorating job market and the economy call for large interest rate cuts to get monetary policy to neutral.
- The prospect of lower US interest rates boosts investors’ appetite for riskier assets amid hopes for a peace deal between Russia and Ukraine. President Volodymyr Zelenskiy said on Tuesday that Ukraine is ready to advance a US-backed framework for ending the war with Russia. This might cap the safe-haven JPY as traders look to the delayed release of US Durable Goods Orders, along with the US Weekly Initial Jobless Claims, for a fresh impetus around the USD/JPY pair.
USD/JPY could extend intraday recovery above Asian session top, around the 156.35 area
The USD/JPY pair now seems to have found acceptance below the 100-hour Simple Moving Average (SMA) and the 38.2% Fibonacci retracement level of the recent move up from the monthly low. Moreover, negative oscillators on hourly charts back the case for additional losses. However, technical indicators on the daily chart are holding in positive territory, suggesting that any further slide is more likely to find decent support near the 155.30 region, or the 50% retracement level. This is followed by the 155.00 psychological mark, which, if broken decisively, will be seen as a fresh trigger for bearish traders and pave the way for deeper losses.
On the flip side, any attempted recovery back above the 156.00 mark now seems to confront an immediate hurdle near the Asian session high, around the 156.35 region. Sustained strength beyond the latter could trigger a short-covering move and allow the USD/JPY pair to reclaim the 157.00 round figure. Some follow-through buying might then set the stage for additional gains toward the 157.45-157.50 intermediate hurdle en route to the 158.00 neighborhood, or the highest level since mid-January, touched last week.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
