Japanese yen extends rally

The Japanese yen has posted strong gains for a third straight day. USD/JPY is trading at 138.43, down 0.82% on the day. US markets are closed for the Thanksgiving holiday, but that hasn’t put a damper on the yen’s impressive rally.

Inflation has been on the rise in Japan, although at much lower levels than we’re seeing in Europe and the United States. The Bank of Japan’s preferred indicator, BOJ Core CPI, accelerated in October for a ninth straight month, rising to 2.2%.  We’ll get a look at Tokyo Core CPI for October later today, which is expected to edge up to 3.5%, up from 3.4% in September. The indicator has accelerated for five consecutive months.

Japan’s manufacturing contracts

Japan’s economy remains fragile, and the manufacturing sector hit a snag earlier today. Manufacturing PMI fell to 49.4 in  October, down from 50.7, which was also the consensus. This marked the first contraction in two years – the 50.0 level separates contraction from expansion. Manufacturers in Japan and elsewhere are grappling with higher input costs, while domestic and external demand has weakened, and this situation is unlikely to improve until inflation turns lower and growth recovers.

The Fed minutes were viewed by the markets as dovish, which has pushed the US dollar lower today. The minutes noted that the Fed plans to implement smaller rate hikes “soon”, and the markets are expecting that already at the December meeting, the Fed will raise rates by “only” 50 bp, after four straight hikes of 75 bp. Although inflation remains a huge concern for Fed members, there is no agreement on the terminal rate. The 4.75%-5.25% range appears a safe bet, at least for now, which means that the current rate-hike cycle is on schedule to wind up in early 2023.

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USD/JPY Technical

• USD/JPY is testing support at 141.55. Below, there is support at 140.77
• There is resistance at 142.74 and 143.60

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