Yen slips to 5-year low

The Japanese yen continues its downswing early in the New Year. USD/JPY is trading at 115.95 in the European session, its highest level since January 2017.

US Treasury yields weigh on yen

The US dollar has brought in the New Year with a bang, rallying sharply against the major currencies. The dollar has looked impressive against the faltering yen, as USD/JPY hasn’t recorded a losing week since November.

The catalyst driving the greenback’s success early in 2022 has been the jump in US bond yields. The 10-year yield finished 2021 above the 1.50% level and has now pushed above 1.60%. The widening US/Japan rate differential has sent the yen sharply lower, as the currency is extremely sensitive to the rate differential. If US yields remain high, we could see the dollar rally as high as 118 over the coming weeks.

Inflation has become a hot topic for the Federal Reserve and the BoE, as policymakers must deal with inflation levels that are double or triple the banks’ inflation target of 2%. In Japan, inflation has been at low levels for years, with deflation a constant problem. However, Japan hasn’t been immune to surging energy costs and rising prices of raw materials, which have been exacerbated by pent-up demand as Covid-related restrictions have been eased.

Inflation in Japan is subdued compared to the US or the UK, but inflationary pressures are starting to squeeze consumers and businesses. Inflation expectations have risen, and the government’s policy of encouraging firms to pay higher wages should continue to push inflation upwards. This means that the Bank of Japan is expected to pay more attention to inflation, although a shift in the bank’s ultra-loose monetary policy is unlikely until inflation moves close to the bank’s target of around 2%.

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USD/JPY Technical

• USD/JPY continues to put pressure on resistance at 114.83. Above, there is resistance at 115.26
• There is support at 112.90 and 112.47

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