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Japanese Yen dips as risk tone weighs, BoJ rate hike bets limit losses | FXStreet

The Japanese Yen (JPY) edges lower during the Asian session on Tuesday and retreats further from a two-week high, touched against its American counterpart the previous day. A generally positive tone around the Asian equity markets is seen as a key factor undermining the JPY’s safe-haven status. Apart from this, the JPY downtick lacks any obvious fundamental catalyst and is more likely to be limited on the back of Bank of Japan (BoJ) Governor Kazuo Ueda’s strong signal that a December interest rate increase could be under consideration.

Furthermore, speculations that government authorities might step in to stem further weakness in the domestic currency might hold back the JPY bears from placing aggressive bets. The US Dollar (USD), on the other hand, might continue with its struggle to attract any meaningful buyers amid the growing acceptance that the Federal Reserve (Fed) will lower borrowing costs again this month. This would further narrow the US-Japan rate differential, which, in turn, should support the lower-yielding JPY and cap the USD/JPY pair’s attempted recovery.

Japanese Yen is pressured by receding safe-haven demand; bulls have the upper hand amid BoJ rate hike bets

  • Asian stocks stage a modest recovery after the previous day’s selloff, undermining traditional safe-haven assets and prompting some selling around the Japanese Yen during the Asian session on Tuesday. This, along with a modest US Dollar (USD) uptick, assists the USD/JPY pair in building on the overnight bounce from the 154.65 region, or a two-week low.
  • Bank of Japan Governor Kazuo Ueda offered the strongest signal yet toward further normalization and said on Monday that the likelihood of the central bank’s economic and price projections being met is rising. In fact, inflation in Japan has remained above the central bank’s 2% target for over three years, strengthening the case for policy tightening.
  • Traders were quick to react and are pricing in a roughly 80% chance of a rate hike at the December 18-19 BoJ meeting, up from around 60% last week. The outlook pushed the rate-sensitive two-year Japanese government bond yield to 1% for the first time since June 2008 on Monday, and the 20-year yield to levels not seen since November 2020.
  • Moreover, the 30-year government bond yields climbed to a record peak on Tuesday, and the 10-year yield reached a 17-year high, which, in turn, backs the case for the emergence of some dip-buying around the JPY.
  • Japan’s Finance Minister Satsuki Katayama said on Sunday that recent erratic swings in the foreign exchange market and rapid JPY weakening are clearly not driven by fundamentals. It’s our position to issue warnings against such matters, Katayama added further, fueling speculations about the government intervention to stem any further JPY weakness.
  • The US Dollar dived to a two-week low on Monday after the Institute for Supply Management’s (ISM) Manufacturing PMI fell to 48.2 in November, down from 48.7 in the previous month. The reading missed consensus estimates and comes on top of the recent tepid US economic data, suggesting that growth in the world’s largest economy is cooling.
  • Moreover, dovish signals from Federal Reserve officials fueled speculation for another rate reduction this month. In fact, the CME Group’s FedWatch Tool indicates a nearly 88% chance of a quarter-point rate cut at the Fed’s December 9–10 meeting. This marks a big divergence in comparison to the BoJ’s hawkish outlook and should cap the USD/JPY pair.
  • Heading into next week’s Fed rate decision, investors will confront the release of the US Personal Consumption Expenditure (PCE) Price Index – the central bank’s preferred inflation gauge – for more cues about the future rate-cut path. The uncertainty, however, remains in the absence of the official jobs report because of the recent federal government shutdown.

USD/JPY is likely to confront stiff resistance near the top end of the descending channel, around the 156.00 neighborhood

The USD/JPY pair’s corrective slide from the 158.00 neighborhood, or the highest level since mid-January, touched last month, has been along a downward-sloping channel. The overnight bounce validates the trend-channel support, which coincides with the 61.8% Fibonacci retracement level of the November upswing and should now act as a key pivotal point. A convincing break below will be seen as a fresh trigger for bearish traders and pave the way for an extension of the pair’s two-week-old downtrend. In the meantime, the 155.00 psychological mark could protect the immediate downside.

On the flip side, any subsequent move up is likely to confront stiff resistance around the 156.00 neighborhood, representing the top boundary of the aforementioned trend-channel. A sustained strength beyond could trigger a short-covering rally and lift the USD/JPY pair to the 156.60-156.65 intermediate hurdle en route to the 157.00 round figure. The momentum could extend further towards mid-157.00s before spot prices make a fresh attempt to reclaim the 158.00 mark.

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.