USD/JPY – up, up and away

The Japanese yen can’t seem to buy a break, as the currency has been pummelled by the US dollar, and is down by a massive 9% this year. Earlier today, USD/JPY hit 126.68, its highest level since May 2002. With the yen in free-fall, the 130 line is looking like a real possibility.

Yen at 20-year low

The main driver behind the yen’s massive fall is the widening US/Japan rate differential, as the yen is very sensitive to rate moves. US yields did edge lower earlier in the week but quickly recovered, as US 10-year yields have risen to 2.83%, marking a 52-week high. With even Fed doves like Lael Brainard talking about super-size rate increases of 0.50%, there’s a strong likelihood that the Fed will accelerate its tightening cycle, which would provide a strong boost for the US dollar.

USD/JPY has breezed past its multi-year high of 125.80 and the upswing looks ready to continue into next week. The Bank of Japan has tried to curb the yen’s nasty slide, trying to “talk down the yen” by stating that the Bank is watching the markets closely and that it is uncomfortable with rapid moves in the exchange rate. That clearly hasn’t done the job, raising the question of whether the central bank will take more aggressive action and intervene in the currency markets.

Many major central banks are tightening policy in response to spiralling inflation, but that is one headache the BoJ doesn’t have. Inflation has risen in Japan due to high commodity prices and supply chain disruptions, but CPI still remains under 1%. A weak yen is ‘good for business’ as it makes Japanese exports more attractive, and the BoJ recently stepped in to defend its yield curve control, when JGB’s showed some upswing. The central bank hasn’t shown any signs of intervening to prop up the yen, but it could change its tune if USD/JPY heads towards the 130 line.

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USD/JPY Technical

• USD/JPY has broken above resistance at 126.15 for the first time since May 2002. Above, there is resistance at 127.63
• There is support at 125.23 and 123.74

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