During the last week, the Japanese yen rolled around against the US dollar. The currency reached a psychological level of 150 against the greenback. It is the weakest yen exchange rate since August 1990. The Japanese yen is currently backed by a significant amount of liquidity. This has helped make Japanese exports more affordable. However, the yen is not immune from global monetary policy tightening. The Bank of Japan (BoJ) is expected to begin raising interest rates in the second half of next year. This is despite a policy shift that is contrary to the BoJ’s ongoing JPY-liquidity add.
The US Dollar and Japanese Yen is the second most traded currency pair in the world. The pair has been a mainstay of the global monetary policy tightening cycle, and is considered a carry trade. The carry trade is a trading strategy that aims to take advantage of the difference in interest rates between the two currencies. In this case, the difference is caused by the US Treasury bond yields. However, the relationship between the carry trade and traditional risk benchmarks is not as cut-and-dry as it may seem.
The US Dollar has been sluggish in recent days, and may be heading towards a new low. However, it may rebound from its recent slide after the Federal Reserve’s meeting minutes are released this week. The minutes will provide some clues as to the Fed’s upcoming rate hike. However, the market reaction may be short-lived. The next significant piece of economic data, the US Consumer Price Index (CPI), is not available until 27th July. This piece of data is important as it shows how the Fed’s policies are impacting inflation.
The US Dollar is expected to rebound from its recent decline, but it may not get much of a boost. The market will likely take cues from the broader market risk sentiment. The next release of US jobs data may also impact the market. In fact, the Fed may be willing to take a restrictive stance to counter rising inflation, even if it means reversing its recent aggressive rate hike. In this case, the Federal Reserve may be able to unload the balance sheet sooner than expected.
The US Dollar is also under pressure ahead of the US CPI. This piece of economic data will also have a direct impact on the USD/JPY pair. It will also provide clues about the direction of the Federal Reserve’s interest rate policy. This could also provide some support for the USD/JPY pair. However, it is not a substitute for a full view of the market.
The US Dollar is also under pressure from a sharp drop in the US Treasury bond yields. The recent decline is not a sustainable long-term trend, and may be a short-lived bounce. However, it does provide a temporary boost to the US Dollar. If the US CPI releases an inflation-friendly read on the CPI, the dollar may take a much larger leap in the exchange rate.