The Japanese Yen (JPY) witnessed a dramatic intraday turnaround against its American counterpart and rallied over 500 pips from the lowest level since October 1986 touched earlier this Monday. The pair plummeted on prospects of a possible intervention by Japanese authorities. However, Japan's top currency diplomat, Masato Kanda, gave a speech in the European session and didn't confirm any FX intervention. Kanda said, "Speculative, rapid and abnormal FX moves have had a bad impact on the economy, so are unacceptable.". Kanda refrained from providing an appropriate level when asked about what could be the probable zone where the administration could intervene if authorities have not stepped yet.
Meanwhile, the emergence of fresh US Dollar (USD) selling also exerts heavy downward pressure on the USD/JPY pair. The downside for the USD, however, remains cushioned in the wake of growing acceptance that the Federal Reserve (Fed) will delay cutting rates amid still sticky inflation in the US. This marks a big divergence in comparison to the Bank of Japan's (BoJ) uncertain rate outlook and suggests that the big US-Japan rate differential will remain for some time. Apart from this, a positive risk tone caps the safe-haven JPY and assists the USD/JPY pair in attracting some buyers near the 155.00 psychological mark.
From a technical perspective, Friday's breakout through an upward-sloping trend channel extending from the YTD low was seen as a fresh trigger for bullish traders. That said, the Relative Strength Index (RSI) on the daily chart is flashing extremely overbought conditions, which prompts aggressive long-unwinding trade on the first day of a new week. Any subsequent slide, however, is likely to find decent support near the 157.00 mark, representing the ascending channel resistance breakpoint. The latter should act as a key pivotal point, which if broken decisively might shift the near-term bias in favour of bearish traders and pave the way for some meaningful corrective decline.
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.
The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.
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