Yen slides to 128 against dollar

The Japanese yen’s downswing has continued full force this week, as the currency can’t find its footing. USD/JPY is trading at 128.40 in Europe, up 1.1% on the day.

Yen closing in on 130

The yen continues its nasty slide, with the currency having fallen for twelve successive sessions against the dollar. USD/JPY has jumped 5.39% in April and shows no signs of slowing down. The lofty 130 level, which has held as resistance since 1998, is likely to fall in the next few months or even earlier.

The driver behind the yen’s downswing is the US/Japan rate differential. US Treasury rates continue to rise, with the 10-year yield currently at 2.90%. Meanwhile, JGB yields aren’t going anywhere, as the BoJ recently demonstrated when it intervened to cap 10-year yields at 0.25%, which has become a line in the sand for the BoJ’s yield curve control.

The BoJ has sufficed, until now, with jawboning about the exchange rate. This was again the strategy today when Governor Kuroda said that the yen’s moves were “somewhat rapid”, while he repeated that a weak yen was beneficial for the Japanese economy. The BoJ is more concerned about boosting inflation and will press ahead with loose monetary policy. That means that the central bank is unlikely to intervene to prop up the ailing yen. That could change, however, if USD/JPY punches above the 130 level.

It’s the opposite story with the Federal Reserve, which is expected to increase rates by 0.50% at its meeting in early May. Fed policymakers have been telegraphing a hawkish stance in the light of spiralling inflation. On Monday, Fed member Bullard, a hawk, said that the Fed rate might need to rise to a “neutral” rate of 3.50% and suggested that a 0.75% hike was a possibility. True, this statement doesn’t reflect Fed policy, but the very suggestion of a 0.75% hike illustrates how sharp a pivot the Fed has taken in recent weeks.

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USD/JPY Technical

• USD/JPY continues to climb and break above resistance lines. The pair has broken above resistance at 1.2837. Above, there is resistance at 130.05
• 126.32 is a monthly support line. Next, there is support at 1.2572

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