- The recent sell-off in USD/JPY has been halted in the past few weeks, supported by strong intervention from the Bank of Japan (BoJ).
- The pair, which peaked at 160.26 in May, has fallen to around 155.56 as focus shifts to Fed and BoJ actions.
- However, according to reliable trading platforms, the yen is still at risk.
- The yen's recent strength has been driven by action from the BoJ, which has spent over $62 billion in currency interventions.
- These were the first interventions since 2022 when the currency was in freefall.
- I believe that currency interventions provide a short-term reprieve for the currency. In fact, the yen has fallen sharply since the last interventions in 2022.
Unfortunately, there is no easy solution to the Japanese Yen crisis. While further interest rate hikes would be ideal, their effects on the economy would be dire due to Japan’s massive debt. Japan’s total public debt is close to $10 trillion, which is much higher than the country’s GDP of over $4.7 trillion. Therefore, higher interest rates would put more burden on the government to pay off its debt.
Another challenge facing the Japanese yen is that the US Federal Reserve has hinted that it will keep US interest rates higher for a longer period. Inflation in the US has remained high, with the core CPI remaining at 3.4%. Therefore, the spread between US and Japanese interest rates will remain wide for a long time. Thus, this in turn will make this pair one of the most popular carry trade options in the developed world. Clearly, A carry trade is a situation where investors borrow from countries with low interest rates to invest in countries with higher interest rates.
According to futures trading, the next two weeks will be important for the USD/JPY currency pair. The US will release its latest jobs figures on Friday. Also, economists expect the data to show that the economy added more than 180,000 jobs while the unemployment rate remained at 3.9%. furthermore, the next big news will come next week when the Federal Reserve and the Bank of Japan make their interest rate decisions. Decidedly, the Fed is expected to leave the US interest rate unchanged at 5.25% to 5.50% and maintain its higher outlook for longer.
On the other hand, the Bank of Japan is expected to keep interest rates unchanged and start tapering its bond purchases.
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USD/JPY Technical Analysis and Expectations Today
The USD/JPY exchange rate has been in a tight range for the past few days. It has been holding at 155.60, a few pips below its YTD high of 160.26. Technically, the pair is holding above the 50-day and 25-day exponential moving averages (EMA) while the Relative Strength Index (RSI) is pointing lower. Moreover, we suspect that USD/JPY will continue to rise in the coming weeks as the impact of interventions tends to be short-lived. If this happens, the initial level to watch would be the year-to-date high at 160.26. ultimately, A move above this level would see the bulls continue.
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