- USD/JPY is approaching April highs, while the Japanese yen loses its appeal as a safe haven as tensions in the Middle East ease.
- Geopolitical risks have not completely disappeared, the new Omicron variant is an external threat.
- Friday is likely to be an important day for USD/JPY with the BoJ meeting and US PCE inflation data.
On Monday, USD/JPY again approached April highs at 154.79, after easing tensions in the Middle East reduced safe-haven flows into the Japanese Yen (JPY). This affects the JPY more than the US Dollar (USD), even though both have safe haven status.
The conflict between Israel and Iran has not worsened as markets feared. Following Israel's only attack on a military base on the outskirts of Isfahan on Friday, Iran has not retaliated. As one of the main safe haven assets, the Yen has seen demand decline and continues its long-term trend of depreciation against the Dollar.
USD/JPY in danger due to risk
Although hostilities in the Middle East have temporarily subsided, the threat of future flare-ups is an ever-present risk.
The geopolitical risks have not completely dissipated and a division appears to be emerging in the world between the West and what Gideon Rachman, chief foreign affairs commentator at the Financial Times, calls an “axis of adversaries.” These include Russia, Iran, North Korea and China.
Rachman points out that the military base outside Ispahan, the target of Friday's Israeli attack, is in fact a nuclear enrichment center using reactor technology supplied by China.
A new outbreak of hostilities or a general intensification of geopolitical risk factors could lead to a rise in safe-haven assets, such as the Yen, with bearish implications for the USD/JPY pair.
War is not the only potential source of geopolitical risk that could put pressure on USD/JPY. Reports of a new strain of the Omicron variant of the COVID-19 virus have also destabilized markets at the start of the new week.
“While the WHO urges caution, it notes that symptoms related to the new strain have so far been mild. Given that it will take some time to determine the likely impact on the global economy, we believe risk aversion will continue this week,” they state. analysts at private investment bank Brown Brothers Harriman in a Monday note.
Some countries have already introduced small social distancing measures, but if the strain begins to spread and pose a more serious health risk, this could pose a new risk factor for investors, causing a constant flow of funds to safe havens, favoring especially the Japanese Yen.
Friday, April 26 is an important day for the USD/JPY, as it will be then when the Bank of Japan (BoJ) holds its April monetary policy meeting and the United States releases Personal Consumption Expenditure (PCE) data. ) for March, including the Federal Reserve's (Fed) preferred inflation indicator, Personal Consumption Expenditure – Price Index.
If PCE inflation in the United States (US) rises more than expected, it will boost USD/JPY by suggesting an even longer delay before the Fed cuts interest rates. If interest rates remain high for longer, demand for USD from foreign investors looking to park their capital will increase.
Likewise, if the BoJ raises interest rates at its meeting or drops hints that it intends to do so in the near future, the Yen will appreciate (putting downward pressure on USD/JPY).
BoJ unlikely to raise interest rates, monetary policy tightening possible
Among institutional analysts, the consensus expectation is that the BoJ will not raise interest rates until October.
“We expect the Bank of Japan to keep its short-term rate target unchanged (range 0-0.1%), after raising the policy rate in March for the first time in 17 years. Looking ahead, we expect the BoJ maintain a path of modest and gradual increases,” stated ABN Amro.
Deutsche Bank believes that there is a risk that the BoJ “removes JGB's purchasing guidelines from its statement or revises them to make its purchasing operations more flexible”, a measure that could support the yen.
Although they see another rise as unlikely, many Japanese officials believe that the recent rise of the US dollar has gone too far and that something must be done to support the Yen.
“The current weakness in the yen (partly driven by the price of Fed rate cuts) means there is a growing likelihood that the BoJ may consider the next rate hike sooner than the current consensus expectation of October 2024 (as indicated by market prices)”, says ABN Amro, adding that in this context, Governor Ueda may try to intervene verbally by dropping hints about future tightening.
Last week, the finance ministers of Japan and South Korea acknowledged their “serious concern over the recent sharp depreciation of the Japanese yen and Korean won,” and Bank Indonesia went further and intervened to stabilize its depreciated currency, according to analysts at Brown Brothers Harriman (BBH).
Impregnability of the USD? “It's hard to find reasons to bet against the USD.”
The US Dollar is currently basking in the glory of an almost bulletproof US economy. Aside from Friday's PCE inflation data, other macroeconomic data to be released on Tuesday and Wednesday could demonstrate the success of the US economy.
“Overall, as long as US economic activity remains strong, the USD's cyclical uptrend will remain intact. Preliminary US April PPI data (Tuesday), Q1 GDP (Thursday) are expected and the personal income and expenditure report for March (Friday) support American economic exceptionalism,” BBH says in a note published on Monday.
USD/JPY bears could face an uphill fight given the perceived impregnability of the US dollar.
“It's hard to find reasons to bet against the dollar,” said Commerzbank currency analyst Michael Pfister in an interview with Bloomberg News. “We've seen the dollar appreciate in the last two weeks due to the inflation surprise. On top of that we have a strong growth advantage and a very aggressive Fed,” the analyst added.
On Friday, the trend of Federal Reserve members becoming more cautious about when they might start cutting interest rates gained new momentum. Chicago Fed President Austan Goolsbee hinted that interest rate cuts would come in the longer term as progress on inflation had “stalled,” adding that inflation had fallen significantly since the 9.1% high reached in the pandemic era, but remained stubbornly above the Fed's target. For his part, Atlanta Fed President Raphael Bostic signaled that the US central bank would not lower rates until the end of the year, according to FXStreet editor Lallalit Srijandorn.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
