In recent weeks, the Japanese Yen (JPY) has failed to strengthen despite the bullish movements in 10-year Japanese Government Bond (JGB) yields and overnight indexed swap (OIS) rates. This article delves into the main drivers of short-term JPY weakness and analyzes why the yen has been unable to stage a bullish reversal.
The key short-term support on the USD/JPY pair is currently at 155.90. Despite the rise in both the 10-year and 30-year JGB yields, the USD/JPY price actions have managed to hold above its 20-day moving average support level. This suggests a level of resilience in the face of increasing yields and the prospect of a Bank of Japan (BoJ) rate hike in July.
JGB yields and OIS rates are pointing towards a potential rate hike by the BoJ in the upcoming July meeting. The overnight indexed swap rates for 3-month and 6-month periods have risen at a faster pace, indicating that the market is pricing in a higher chance of an interest rate hike. However, this expectation has not translated into a stronger yen performance.
One of the key factors influencing the BoJ’s policy decisions is the inflation data. BoJ Governor Ueda has indicated that any interest rate hike cycle would be contingent on the inflation trend achieving and maintaining the 2% target. While Japan’s producer prices have shown signs of improvement, the core-core consumer price index, which excludes food and energy, continues to decelerate. This trend has been ongoing since August 2023, posing a challenge to the BoJ’s normalization efforts.
The US dollar has been strengthening against major currencies, including the yen. The broad-based strength of the US dollar has been fueled by the recovery in US Treasury yields, with the 10-year yield approaching a key technical level. On a 5-day rolling basis, the yen has emerged as one of the weakest currencies against the US dollar. This trend has been reflected in the USD/JPY pair’s performance, with a minor corrective slide expected if support levels are breached.
The weakness of the yen in the face of rising JGB yields, expectations of a BoJ rate hike, and US dollar strength poses a puzzle for investors. The diverging trends in inflation and monetary policy between Japan and the US contribute to the challenges faced by the yen. Going forward, market participants will be closely watching key support levels and economic indicators to gauge the future direction of the yen.