The Japanese yen bounced back on Friday after a statement by Kazuo Ueda, the Bank of Japan (BoJ) central bank governor. The USD/JPY exchange rate also retreated to 145.53 ahead of a crucial statement by Jerome Powell, the head of the Federal Reserve. It has retreated by over 10.18% from its highest point this year, meaning that it is in a correction.
BoJ rate hikes
The USD/JPY pair has retreated as signs of divergence between the Federal Reserve and the Bank of Japan emerged.
In a statement to parliament on Friday, Ueda noted that the BoJ may consider more interest rate hikes to fight the stubbornly high inflation. Such a move would mean that the divergence will continue since the Federal Reserve will continue.
Recent economic data showed that Japan’s inflation has remained at a higher level in the past few years. The headline Consumer Price Index (CPI) has remained at 2.8% in the past three consecutive months, higher than the year-to-date low of 2.2%.
Japan’s inflation is still lower than in most countries. In the US, the headline CPI retreated to 2.9% in July while in Australia, it rose to 3.8% in the last quarter. Still, the Japanese figure is notable because the country has not experienced any inflation in the past few decades.
The BoJ hopes that its hawkish tone will lead to a relatively stronger currency that will make imports like crude oil and natural gas cheaper in the country.
BoJ’s rate hikes are important because other central banks have either started or are considering cutting interest rates. In Europe, the ECB has already slashed interest rates from 4.50% to 4.25%.
Similarly, the Bank of England (BoE) cut rates by 0.25% in the last meeting while the Federal Reserve has hinted that it will cut in September.
The Japanese yen has also risen as hedge funds and other speculators turned bullish for the first time since 2021. In its last Commitment of Trade (CoT) report, the Commodity Futures Trading Commission (CFTC) said that net longs by speculators like hedge funds moved to 23.k a week earlier.
These funds have been highly negative about the Japanese yen, with the CoT figure tumbling to minus 184k in July.
Jackson Hole Symposium
Friday will be an important day for the USD/JPY pair because Jerome Powell will deliver a speech at the Jackson Hole Symposium, an annual jamboree of central bankers and economists.
With the Federal Open Market Committee (FOMC) not meeting this month, this meeting will be the main platform for Powell to provide hints of what to expect.
The speech will come a day after the FOMC released its minutes, which showed that some members of the committee considered cutting rates in the last meeting.
It will also come after the Bureau of Labor Statistics (BLS) revised its non-farm payrolls (NFP) for the 12 months to May by over 818,000, the steepest number since 2009. These numbers mean that the labor market has been softer than thought and the unemployment rate may be higher than the current 4.3%.
Therefore, the base case among many analysts is that Powell will point to a rate cut in September. While some analysts expect a jumbo 0.50% cut, most of them believe that the bank will cut by 0.25%. It is also likely to deliver at least two more cuts by the end of the year.
The Fed’s view has been supported by the energy sector, where Brent and West Texas Intermediate (WTI) prices have dropped to $77.3 and $73, respectively. As a result, the price of gasoline has slipped to the lowest point in over 6 months, meaning that inflation may continue falling.
Therefore, Fed cuts and BoJ hikes have led to a narrow spread in interest rates between the two countries. This spread may continue narrowing if the BoJ continues hiking interest rates in the next meeting on September 20th.
For a long time, the interest rate differentials between the two countries has led to a risk-free carry trade opportunity that is now unwinding.
USD/JPY technical analysis
The USD/JPY exchange rate has been in a strong sell-off in the past few months. In this period, it has dropped from the year-to-date high of 161.83 to 146. Notably, the pair is about to form a death cross as the 200-day and 50-day moving averages cross each other and the US dollar index (DXY) crash intensifies.
The MACD indicator has remained below the neutral point but is pointing upward. Similarly, the Relative Strength Index (RSI) has moved slightly above the oversold level. Therefore, the USD/JPY pair will likely continue falling, with the next target to watch being this month’s low at 141.65 followed by 140.26, its lowest point in December last year.
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