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JPY KEY POINTS:

  • USD/JPY slipped back in Europe, with EUR/JPY weakness leading
  • Markets see plenty more monetary tightening, just not in Japan
  • Intervention by Tokyo has happened before close to current levels

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Fundamental Backdrop

The Japanese Yen gained quite sharply against the United States Dollar on Friday, albeit in a market possibly thinner than normal as traders await official news of the US labor market.

USD/JPYslipped below 143 in the European morning, possibly weighed down by some cross currency weakness in EUR/JPY as German industrial production was revealed to have fallen in May, confounding hopes that it might have at least remained flat.

The Japanese central bank remains perhaps the clearest major-economy outlier as it has declined to tighten its own extremely loose monetary policy even as everyone else has been racing to hike rates. The Bank of Japan still sees inflation as very much a global phenomenon and fears that the Japanese domestic demand it has striven for so long to nurture is still absent.

Rising interest rates across developed markets have seen the Yen’s comparative yield charms fade even further. There’s plentiful market speculation that the Bank of Japan may yet tweak its monetary policy, particularly its control of local bond yield curves, but it seems almost vanishingly unlikely that it will significantly tighten its own monetary settings.

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The BoJ’s new Governor, Kazuo Ueda, took office in April and has so far shown little inclination to move far on policy.

What may concern traders more is the prospect that Tokyo could intervene in the currency markets to halt the Yen’s slide. In the past Japan’s authorities have been relaxed about a weaker currency, as it suited their export-driven economy. Now, with many Japanese operations outsourced overseas, a weak Yen is more of a problem.

The central bank did intervene in the market last year, when USD/JPY got up to 145. That level is now one the market approaches with some trepidation.

On Friday the market is overwhelmingly focused not on Japan but on the US, and the monthly official labor-market report. Nonfarm payrolls are expected to have risen by 225,000 in June, with the unemployment rate ticking down to 3.6%. Earnings are forecast to have risen by 4.2% on the year. As-expected numbers will keep the idea that US rates will rise very much in focus and may well weigh on the Yen,

Technical Analysis

USD/JPY Daily Chart

Chart Compiled Using TradingView

USD/JPY’s rally seems to be petering out before it has recovered the heavy falls seen between October 2022 and January this year.It’s probably too soon to say that the attempt has failed, but Yen bears have work to do id they’re to get that recovery back on track.

They have come tantalizingly close to clawing back the heavy falls seen on November 10, but have so far failed to close the gap between current market levels and the trading band seen around the end of last year.

For now, despite recent weakness, USD/JPY looks well supported above even the first Fibonacci retracement of its rise up from the lows of January to its recent highs. That doesn’t come in until 140.752. Ahead of that there is likely support at 140.301, June 20’s intraday high.

Still, the pair looks more consolidative than in serious danger of a reversal at this point, with the bullish uptrend still securely in place. It might take a durable return to May’s levels around the 136 handle, perhaps at least, to challenge that view.

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–By David Cottle for DailyFX



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