Japanese yen keeps rolling

The Japanese yen has extended its gains as USD/JPY trades at a 3-week low. In the North American session, USD/JPY is trading at 114.25, down 0.35% on the day. Will the yen break into 113-territory before the end of the week?

Yen makes most of US dollar retreat

The Japanese yen has jumped onto the currency bandwagon this week, taking advantage of a US dollar in retreat. USD/JPY has dropped 1.11% this week, as the safe-haven yen has joined riskier assets such as the Australian and Canadian dollars and made sharp inroad against the greenback.

It has been a rough January for the yen, which has lost ground as US Treasury yields have shown a monster spike since the start of the year. However, the yield rally has run out of steam this week, with 10-year yields holding steady at 1.73%. This has allowed the yen to recover some of the sharp losses seen in  January. The yen is very sensitive to the US/Japan rate differential, and if US yields resume their upswing, we can expect USD/JPY to rise as well.

The US dollar remains in retreat mode, which is somewhat surprising, considering recent economic data. Nonfarm payrolls came in at 199 thousand, well short of the consensus of 425 thousand. This was followed by a 7% CPI release, which was even higher than the previous reading of 6.8%. Both of these events should have given the US dollar a boost, but investors remain in a risk-on mood and are supportive of the other major currencies. The markets were soothed by Fed Chair Jerome Powell’s testimony in Capitol Hill that red-hot inflation would ease during 2022.

In short, the markets have a healthy risk appetite and do not seem concerned by the hawkish pivot from the Fed as it moves towards a normalization of policy. Still, risk sentiment can change quickly and we could see the US dollar rebound if inflation moves even higher or if Omicron causes more economic damage than anticipated.

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USD/JPY Technical

• USD/JPY faces resistance at 116.29. Above, there is resistance at 117.02, which has held since January 2017
• There is support at 114.89 and 114.22

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