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Japanese Yen off its weakest level against the Greenback with US session triggering some easing

  • The Japanese Yen softens on Friday as BoJ’s Ueda faced questions in parliament.
  • The Yen is trading flat for the week, unable to hold on to gains against the Greenback. 
  • The US Dollar Index extends recovery for a second day after Wednesday’s meltdown. 

The Japanese Yen (JPY) trades flat for the week, posting a second day of losses against the  US Dollar (USD) on Friday. The JPY is struggling against the Dollar during the latter part of the week, almost reversing the surge it registered on Wednesday against the US Dollar after the US Consumer Price Index (CPI) report showed inflation pressures are easing.  Bank of Japan (BoJ) President Kazuo Ueda faced on Friday questions in the parliament on monetary policy and recent market events, but investors reacted rather tepidly as he didn’t provide any real market-moving comments. 

Meanwhile, the DXY US Dollar Index – which gauges the value of the US Dollar against a basket of six foreign currencies – is trying to extend recovery from the steep decline it faced after the CPI data for April. However, there are not many reasons left for the Greenback to outperform. The interest rate differential could still provide some strength to the US Dollar, but the economic data is no longer really outperforming and inflation is back on track towards its disinflationary path. 

Daily digest market movers: Heading into the weekend

  • Friday’s economic calendar doesn’t include any release for the US, so market participants can digest recent data while a slew of US Federal Reserve (Fed) officials are set to speak before the close of the week:
    • At 14:15 GMT, Federal Reserve Bank of Minneapolis President Neel Kashkari will have opening remarks at the International Organization for Standardization Technical Committee 68 (ISO/TC 68) financial services plenary meeting.
    • Kashkari will introduce Federal Reserve Governor Christopher Waller, who will give a speech about payment innovation at the same stage. 
    • Near 16:15 GMT, Federal Reserve Bank of San Francisco President Mary Daly delivers a speech at the University of San Francisco School of Management commencement ceremony.
    • Daly and Waller are both voting members of the Federal Open Market Committee (FOMC) this year. 
  • Equities trade mixed on Friday. Japan has closed off, with the Topix up 0.30% and the Nikkei down 0.34% on the day, while US equity futures are still looking for direction ahead of the US opening bell. 
  • The CME Fedwatch Tool suggests a 91.3% probability that June will still see no change to the Federal Reserve’s fed fund rate. Odds have changed for September, with the tool showing a 50.5% chance that rates will be 25 basis points lower than current levels.
  • The benchmark 10-year US Treasury Note trades around 4.39%, and hovers near the lower levels for this week. The benchmark 10-year Japan Treasury Note (JGB) trades around 0.949%, and is just a touch below the high of this week at 0.957%.

USD/JPY Technical Analysis: Easing, though with a different USD

The USD/JPY pair still has some room to go, with buyers who bought at that 153.00 area not really taking much profit, seeing that no chunky outflows are being noticed. This creates a small imbalance in the trade which sees buyers willing to pay higher prices to get in. Although a revisit to the 160.00 area looks a bit of a stretch, a recovery to 156.74 first and 158.00 next could be in the cards, likely to open the risk again of another intervention. 

Central banks FAQs

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.