Amid an interesting performance, the Japanese yen dropped to a two-decade low by midweek trading as the USD/JPY pair made gains above a key level of long-term technical resistance around the 2015 highs on the charts. It may be at risk of deeper declines in the coming months if emerging strength in dollar exchange rates persists. The Japanese yen fell to its lowest level against the US dollar since October 2002 on Wednesday, sending the USD/JPY pair above 126.00 for the first time in two decades. Bond yields differences indicated Japanese Americans indicate that a period of consolidation may now be in place.
The Japanese yen hit new lows as US exchange rates rose broadly, continuing the recent trend that saw the Japanese currency suffer its biggest losses during bouts of US dollar strength. Wednesday’s rally could also have a domestic driver as well. Bank of Japan Governor Kuroda warned that the Bank of Japan will continue to provide aggressive monetary easing to support the recovery from the pandemic. “In contrast, the Fed is more hawkish,” says Elias Haddad, chief forex analyst at the Commonwealth Bank of Australia.
Bank of Japan Governor Haruhiko Kuroda added at the annual meeting of banks of confidence that rising import costs and the resulting pressure on income are likely to hamper Japan’s economic recovery. It may necessitate the continuation of the stimulus monetary easing policies of the BoJ. “In light of this economic and price situation, the Bank of Japan will continue to implement the current strong monetary easing to aggressively support economic activities in the process of recovering from infectious diseases, with a target of 2% for ‘price stability’,” Kuroda stated. We will aim for a sustainable and stable achievement.
Overall, the Bank of Japan’s monetary policy remains as expansionary as it has been at any other time even as the Fed moves towards what is now widely expected to be its tightest monetary tightening cycle in decades. This has put pressure on others including the European Central Bank (ECB) to take incremental steps towards normalizing the monetary policy stance. The Bank of Japan has shown no signs of inclined to budge from its position that the current extraordinary levels of monetary stimulus remain essential to the economy. .
Commenting on the performance, Jeremy Stretch, Head of FX Strategy at CIBC Capital Markets said: “Having seen 10-year spreads above 250 basis points for the first time since May 2019, we expect USD/JPY to remain well supported. “.
The growing gap between the policy positions of the Federal Reserve and the Bank of Japan has resulted in strong and broad upward pressure on the dollar, and since the first weeks of March, this pressure has culminated in a sharp rally in the USD/JPY. “One could argue that the events of the past three weeks have helped explain that US interest rates are a more important driver of the USDJPY than oil,” wrote Greg Anderson, FX Analyst at BMO Capital. While we acknowledge that this may be the case, we are very concerned about the durability of the USDJPY rally at this point because it appears to be flying on one engine rather than two.”
The analyst added, “The rally in US bond yields that is occurring in conjunction with the upward move in the dollar against the Japanese yen provides decent rhetorical support for the dollar bulls against the Japanese yen. If there is an iron bar connecting them, the price action suggests that a move to around $130 against the Japanese yen is guaranteed. However, there is no such mechanistic link between the variables.
According to the technical analysis of the pair: The bullish trend of the USD/JPY currency pair is getting stronger and entrenched. There is a clear disregard for investors from the arrival of technical indicators towards strong overbought levels after the recent gains. I still expect a profit taking sale at any time. According to the performance on the daily chart, selling operations may collide if they occur with the support levels 124.60 and 123.00 in the first period of the rebound to the bottom. On the other hand, expectations for the historical psychological top may increase to 130.00 if the bulls succeed in surpassing the 127.30 resistance barrier. I’d still rather sell than consider buying after recent gains.