Japanese yen falls to 20-year low

Dollar continues to pummel yen

The Japanese yen continues to lose ground. USD/JPY touched the 133 line earlier in the day, as the yen hit a 20-year low. In the North American session, USD/JPY is trading at 132.55, up 0.50% on the day. The dollar index rose as much as 0.39% today and hit its highest level since May 23^rd, before giving up these gains.

The sharp descent of the yen can be attributed to two factors. First, US Treasury yields are moving higher, and on Tuesday, the 5, 10 and 30-year yields are now above the 3 per cent level. The upward move in US yields could be related to this week’s USD 96 billion in government bond sales in the 3, 10 and 30-year tenors. The dollar has momentum and if Treasury yields remain above 3% and Friday’s US CPI print is high, USD/JPY should respond with further gains.

The second factor weighing on the yen is the Bank of Japan’s ultra-accommodative policy. BoJ Governor Kuroda said on Monday that monetary tightening was “not suitable” and that the central bank would maintain its ultra-loose policy until the Bank achieved its inflation target of 2.0%. The BoJ has been quick to intervene to defend its yield curve, purchasing JGBs in order to cap yields on 10-year bonds at 0.25%. There has been speculation that the BoJ has a ‘line in the sand’ at which it would intervene to prop up the yen, but the yen continues to fall and touched 133 today with no signs that the BoJ is planning to step in. It should be remembered that Kuroda has stated on more than one occasion that a weak yen is mostly positive for the economy. In addition, surging oil prices are pressuring the yen, as crude oil is priced in US dollars.

With US rates moving higher and the BoJ keeping a cap on JGB yields, the US/Japan rate differential continues to widen, and the risk to the yen remains tilted to the downside.

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USD/JPY Technical

• USD/JPY is testing resistance at 1.3226. Above, there is resistance at 1.3368
• There is support at 131.24 and 129.56

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