Japanese yen drifting, CPI next

The Japanese yen is little changed in Thursday trade. It has been a rough week for the yen, which broke above the 115 line. On Wednesday, USD/JPY climbed as high as 115.52, its highest level since January 2017.

Japanese inflation ticks higher

Japanese inflation has been edging higher, which is not an event we are used to reporting on these pages. Inflation is certainly much more subdued than what we’re seeing in the US and the UK, where inflation has become a hot issue and is affecting monetary policy. Still, rising fuel prices have become a major concern for consumers and businesses, and the government’s new economic package is expected to provide some relief. Many businesses have been hit hard by cost pressures, due to the weak yen, supply chain disruptions and high commodity prices. Consumer inflation would be even higher than it is, if not for the fact that most firms are reluctant to pass the increase in costs to consumers. We’ll get a look at Tokyo CPI later today, with a consensus of 0.4%, after a gain of 0.1% beforehand.

The dollar is flexing some muscle, as the Federal Reserve hinted in the November meeting minutes that it will accelerate the pace of tapering. There are expectations that the Fed could announce at the December meeting that it will double its monthly reduction, which would mean that the taper will finish ahead of the mid-2022 target. This would allow the Fed to raise rates sooner if needed. This week’s data has also given the dollar a boost. The PCE Price index, the Fed’s favorite inflation gauge, rose 4.1% in October, y/y, up from 3.7%. As well, unemployment claims fell to their lowest level since 1969.

The Japanese yen remains under pressure and is on target for the dubious honour of being the worst-performing G-10 currency in 2021. The yen is extremely sensitive to the USD/JPY rate differential and higher US Treasury yields have pushed the exchange rate above 115. If the Fed raises interest rates next year, a yen at the 120 level is entirely feasible.

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USD/JPY Technical

• 115.57 is under pressure in resistance. 116.18, which has held since January 2017, is next.
• USD/JPY has support at 114.80 and 113.42

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