Is Japan in favor of a weaker yen?

  • The dollar yen hit a new 24-year high at 139.39 on Wednesday.
  • US inflation and fears of recession propel the US dollar, the euro breaks parity.
  • Divergence between BOJ and Federal Reserve policies boosts USD/JPY.

The U.S. dollar continued its rampage in currency markets, hitting quarter-century highs against the yen and euro on Thursday.

US consumer inflation jumped to 9.1% in June, initially making a 100 basis point hike in fed funds a better bet than even in the Treasury futures market. Consumer spending was slightly higher than expected in June, although the difference, and more, is likely due to price inflation and not higher spending volumes. The apparent lack of a negative impact from inflation on consumer purchases pushed Treasury yields and the dollar lower on Friday and sent down the forward odds of a 100 basis point increase on July 27 unless by 30%.

Fears of a US and global recession in the second or third quarters kept security trading active and funds flowed into US assets and the dollar.

It is highly unusual to see US interest rates rise in an uncertain and fragile economy. Interest rates are normally countercyclical, rising when the economy overheats and falling when growth falters.

Friday’s release of US retail sales gave dollar bulls reason for slight profit taking after this week’s 2.1% run to Thursday’s high and 9.4% rise. % since May 30.

Next Wednesday’s Bank of Japan (BoJ) rate decision, or perhaps no decision is a better description, will contrast sharply with the Federal Reserve’s overactive policy. Whether the Federal Open Market Committee (FOMC) opts for an increase of 75 or 100 basis points, the sovereign rate spread should widen in the coming weeks. The BoJ’s dedication to its failed policy of accommodation is one of the great enigmas of modern economic and political policy.

Japanese industrial production for May has been revised down and has now fallen for three consecutive months. Capacity utilization fell 9.2% in May, its biggest drop since the first pandemic-related lockdowns. Initial jobless claims hit their highest level since February and are 46% above their low in April.

Along with the CPI and retail sales releases, producer prices rose 11.3% in June, from 10.9% in May, with core prices falling slightly to 8.2% from 8, 5%. Industrial production and capacity utilization were weaker than expected in May, although Michigan consumer confidence in July did not fall as expected.

USD/JPY Outlook

Even though the markets have largely assessed the policy divergence between the BoJ and the Fed, with the Japanese meeting this week and the Americans the next, rate policy will remain in focus until decisions are made. taken. Treasury futures reversed nearly 75% certainty that the Fed would choose the most aggressive 100 basis point hike at the start of the week, to the same percentage for a 75 basis point increase on Friday, but the impact on the market was nil.

Ahead of the last BoJ meeting, some comments from the Diet and an indirect reference from Governor Haruhikoo Kuroda to the impact of inflation on Japanese households seemed to suggest that a policy discussion was underway at the bank. Since then, Kuroda has warned that Japan faces “very great uncertainty” over the economic outlook and reiterated the BoJ’s willingness to accelerate stimulus measures to bolster the fragile recovery. The entire central banking world is moving towards higher interest rates. Has the BoJ decided that a weaker yen is the best option for a moribund Japanese economy?

Japanese information is limited to national CPI and trade data for June, which will not move markets. In the US, Existing Home Sales and S&P Global PMIs headline a limited release schedule.

With the Fed’s rate dominance restored to the big favourite, the outlook for USD/JPY is higher regardless of any interim profit taking. The base at 137.50 should remain untouched.

Japan statistics from July 11 to July 15

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US statistics from July 11 to July 15

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Japan statistics from July 18 to July 22

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US statistics from July 18 to July 22

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USD/JPY Technical Outlook

The negative crossover of the June 30 signal line with the Moving Average Convergence Divergence (MACD) price line did not signal a downtrend as it was easily negated by the strong fundamentals favoring the USD/ JPY. The signal line’s positive cross on Wednesday was supported by the relative strength index (RSI) touch on overbought status, but it does not signal an upward technical trend. Volatility in the Average True Range (ATR) has been declining for three weeks and Wednesday’s rise has not restored a broader outlook. Despite the favorable distribution of these indicators, the continuation of the upward trend of USD/JPY depends on fundamental and non-technical factors.

Resistance: 139.40, 140.00, 140.50, 141.00

Support: 138.00, 137.40, 137.00, 136.55

moving averages; 21 days 136.22, 50 days 132.77, 100 days 127.88, 200 days 121.13

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