07 Jan 2025

• The Japanese Yen drops to a fresh multi-month low amid wavering BoJ rate hike expectations.
• Intervention fears, geopolitical risks and the cautious mood drives haven flows towards the JPY. 
• The widening US-Japan yield differential should cap any meaningful JPY appreciating move.
• The Japanese Yen (JPY) has experienced a rebound against the US Dollar after reaching its lowest point in nearly six months earlier this Tuesday. This movement comes amid concerns that Japanese authorities may intervene in the foreign exchange market to support the domestic currency. Additionally, apprehensions regarding the tariff strategies of US President-elect Donald Trump, along with geopolitical uncertainties and a generally cautious market sentiment, have provided some backing for the safe-haven JPY.
  
  Conversely, the US Dollar (USD) remains subdued, trading below the two-year high it achieved last week, which serves to limit the upward movement of the USD/JPY pair. However, uncertainty regarding the timing of the Bank of Japan's next interest rate hike may pose challenges for the JPY. Furthermore, the recent increase in the yield differential between the US and Japan, driven by the Federal Reserve's hawkish stance, suggests that JPY bulls should exercise caution.

• Japanese Yen gains some respite following interevention warning from Japan's Finance Minister

  • Japan's Finance Minister Katsunobu Kato made a statement on Tuesday, indicating that the government is prepared to take necessary measures against excessive foreign exchange fluctuations, particularly those influenced by speculators.
    
    Last month, the Bank of Japan suggested that it might delay its next interest rate increase due to uncertainties surrounding the economic policies of US President-elect Donald Trump, which have been contributing to the depreciation of the Japanese Yen.
    
    Trump refuted a report from the Washington Post that claimed his administration would adopt a less aggressive approach to tariffs, stating that it would only target specific sectors rather than implementing the broad tariffs that were promised during his campaign.
    
    On Monday, Bank of Japan Governor Kazuo Ueda noted that the central bank would consider raising interest rates further if the economy continues to show improvement, while also emphasizing the importance of assessing various risks before making such a decision.
    
    Additionally, the increasing inflationary pressures in Japan suggest a potential rate hike by the BoJ in January or March, which has led to the yield on benchmark 10-year Japanese government bonds reaching its highest level since July 2011.
    
    In the meantime, the yield on 10-year US Treasury bonds surged to a multi-month high following the Federal Reserve's hawkish stance, which anticipates only two quarter-point rate cuts in 2025 amid persistently high inflation in the United States.
    
    The resulting widening of the interest rate differential between the US and Japan, coupled with a prevailing risk-on sentiment, offers little relief to the safe-haven Japanese Yen and does not impede the USD/JPY pair's upward movement above the 158.00 mark.
    
    Traders are now focused on Tuesday's US economic data, which includes the ISM Services PMI and JOLTS Job Openings, seeking direction ahead of the FOMC minutes and the US Nonfarm Payrolls scheduled for Wednesday and Friday, respectively.

  • USD/JPY could accelerate intraday corrective pullback below daily swing low, around mid-157.00s

    From a technical standpoint, a sustained movement above the 158.00 level may serve as a new catalyst for bullish traders, enhancing the potential for further gains. This optimistic perspective is bolstered by the oscillators on the daily chart, which remain firmly in positive territory and have not yet approached the overbought zone. Consequently, an upward movement towards the 159.00 round figure, followed by the 159.45 intermediate resistance and the 160.00 psychological level, appears to be a plausible scenario.
    
    Conversely, the 158.00 level now acts as a safeguard for the immediate downside, with the 157.55-157.50 area following closely. Any additional pullback is likely to be perceived as a buying opportunity, with support expected around the 157.00 mark. However, if there is significant follow-through selling, the USD/JPY pair could decline to the 156.25 intermediate support, potentially reaching the 156.00 level. This latter point is crucial; if it is decisively breached, it may undermine the current positive outlook and lead to a more substantial corrective decline.