The Japanese yen continues to lose ground. Last week, USD/JPY rose 1.41% and has added another 0.97% on Monday. Earlier in the day, USD/JPY touched 125.55, its highest level since June 2015.
Yen slides, BoJ downgrades economy
It has been a bleak start to the week for the Bank of Japan. The central bank has tried to curb the yen’s slide against the dollar, albeit with limited success. USD/JPY jumped 5.85% in March and the upswing hasn’t let up, with a gain of 3.15% so far in April, with no end in sight for the yen’s slump. With USD/JPY punching above 125 on Monday, it came as no surprise that a senior BoJ official responded with a warning that excessive volatility in the exchange rate was hurting businesses. The BoJ also expressed its concern last week when USD/JPY rose above the 125 line, but clearly, this hasn’t done much to stem the yen’s nasty slide.
US Treasury yields continue to surge, with the 10-year bond rising to 2.78%, its highest level since 2019. The US/Japan rate differential continues to widen, which is bearish for the yen, as the currency is very sensitive to the rate differential.
The BoJ on Monday downgraded its outlook for 8 of 9 regional economies, with Governor Kuroda warning that the war in Ukraine had led to “very high uncertainty” as to the impact on Japan’s economy and inflation. This has raised concerns that the BoJ may lower its growth forecasts later in April, which could put further pressure on the wobbly yen.
The Fed is under pressure to move quickly and quench spiralling inflation. Policy makers have been busy telegraphing the possibility of 0.50% hikes, and there are growing expectations of back-to-back 0.50% hikes in May and June. The Fed prefers increments of 0.25%, but is scrambling after falling behind the curve on inflation. The danger with super-size rate hikes is that it could send the economy into a recession, making the increase in rate hikes a tricky task for the Fed.
- USD/JPY has broken above resistance at 125.22. Above, there is resistance at 1.2615, which has held since May 2002
- There is support at 123.71 and 122.81
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