Japanese yen calm

The Japanese yen is drifting in the Monday session. Currently, USD/JPY is trading at 113.66, up 0.10% on the day.

Yen rebounds with a winning week

The yen has looked weak against the US dollar recently, and I for one thought that USD/JPY would punch above the 115 level. The pair did come close last week before reversing directions and moving lower. The yen had its first winning week since late August, which is indicative of the yen’s recent woes against the dollar.

Even with last week’s upturn, the Japanese yen remains vulnerable to the US/JPY rate differential, which could spell further headwinds for the yen. The US 10-year yield remains well above 1.60%, and further gains for Treasury yields will weigh on the Japanese currency.

The yen is also being hobbled by expectations that the Japanese government will embark on another massive stimulus package after the national elections on October 31st. Prime Minister Fumio Kishida should easily win the election, and will likely implement additional monetary easing and spending in order to push inflation higher, as the weak economy could exhibit deflation.

The US and Japan are moving in opposite directions with regard to monetary policy. The Fed is poised to tighten policy by tapering its bond purchase programme at next week’s FOMC meeting. Although Fed Chair Powell has taken pains to emphasize that, “a taper yes, a rate hike no”, the markets will be speculating about the timing of a rate hike, especially with inflation showing no signs of easing anytime soon. The Fed will likely wait until 2023 to raise rates, but a hike could occur earlier if the US economy recovers more quickly than anticipated next year.

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USD/JPY Technical

• There is resistance at 114.32. This line has strengthened as the USD/JPY moved lower last week. Above, there is resistance at 115.14
•  There is support at 113.05, protecting the 113 line. This is followed by 112.60

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