Japanese yen extends gains

The Japanese yen continues to roll, with gains for a third successive day. USD/JPY has fallen below the 114 line and is now at its lowest level since December 21^st. The yen has enjoyed an outstanding week, as USD/JPY is down 1.42%, its sharpest one-week decline since June 2020.

Only a week ago, the USD/JPY punched above the 1.16 line, as US Treasury yields were on a roll and climbed above 1.70%. The yield rally has run out of steam as yields have plateaued, allowing the yen to recover. 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. This week’s movement is more about the dollar’s broad weakness rather than yen strength, and I would not discount the possibility of a US rebound in the near term.

Japan’s wholesale prices climbed 8.5% in December y/y, after the record-breaking 9.2% gain in November. Wholesale prices have shown growth for 10 straight months, indicative of continuing inflationary pressures. Companies have been hit with a surge in oil and commodity prices, and the gradual passing on of these hikes to consumers is pushing CPI higher.

The Bank of Japan holds a policy meeting on Tuesday. The bank is expected to maintain its ultra-easy policy, but in an acknowledgment of higher inflation, the bank is expected to revise upwards its inflation view for the first time since 2014.  Inflation is nowhere near the high levels we are seeing in the US (7%) and UK (5%), but the upswing in inflation is significant, given that Japan has grappled with deflation for years. According to a Reuters report the BoJ is considering eventually raising rates even if the bank’s inflation target of 2% is not reached.

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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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