- The rise in USD/JPY was driven by cautious markets, with mixed results on Wall Street and the strength of the US Dollar.
- The reduction in the US trade deficit and improvement in business sentiment went unnoticed pending key US inflation data.
- Tokyo's core inflation report suggests continuation of ultra-loose monetary policy by the BOJ, adding context to currency dynamics.
The USD/JPY pair posted decent gains at the end of the North American session, courtesy of risk aversion as investors shrug off economic data from Japan. The pair is trading at 144.55, with an advance of 0.23%.
The Japanese Yen fails to prevail in a state of risk aversion
Risk aversion is driving price developments, as Wall Street is trading with losses in two of its three main stock indices, with drops of between 0.06% and 0.40%. The Nasdaq 100 is the exception, up 0.25%.
In the currency market, the US Dollar Index (DXY), which measures the evolution of the Dollar against a basket of six currencies, advances 0.26%, to 102.56, amid the fall in Treasury bond yields US.
United States (US) economic data was largely ignored by market participants, focused on Thursday's inflation report. However, the US Department of Commerce revealed that the November trade deficit narrowed less than estimates and the previous month's data. The Trade Balance rose to 63.2 billion dollars, compared to 64.5 billion in October and the 65.0 billion expected.
Previously, the National Federation of Independent Business (NFIB) revealed the results of its survey, which showed that business sentiment improved but remained below the 50-year average of 98, standing at 91.9 in December, up from 90.6. of November. The survey highlighted that inflation is the main concern of companies.
On the other hand, core inflation in Tokyo was lower than expected and stood at 2.1% year-on-year, compared to 2.3% in November, matching estimates of 2.1%. Although there has been speculation that the Bank of Japan will normalize its monetary policy in the short term, the data suggests that maintaining ultra-loose policy is the way forward.
On the Japanese economic agenda, the current account will be published on Thursday. In the US, inflation data is expected to show mixed results, which could pave the way for a muted reaction in financial markets.
USD/JPY technical levels
Japanese Yen FAQ
What factors determine the evolution of the Japanese yen?
The Japanese yen (JPY) is one of the most traded currencies in the world. Its value is determined broadly by the performance of the Japanese economy, but more specifically by the policy of the Bank of Japan, the differential between the yield of Japanese and US bonds or the risk sentiment of operators, among other factors.
How do the Bank of Japan's decisions affect the Japanese yen?
One of the Bank of Japan's mandates is currency control, so its movements are key for the yen. The BOJ has intervened directly in currency markets on some occasions, usually to lower the value of the yen, although it often refrains from doing so due to political concerns among its major trading partners. The current ultra-loose monetary policy of the Bank of Japan, based on massive stimuli to the economy, has caused the depreciation of the yen against its main currencies. This process has been exacerbated more recently by a growing policy divergence between the Bank of Japan and other major central banks, which have opted to sharply raise interest rates to combat decades-long levels of inflation.
How does the spread between Japanese and US bond yields affect the Japanese yen?
The Bank of Japan's ultra-loose monetary policy stance has led to increased policy divergence with other central banks, particularly the US Federal Reserve. This supports a widening spread between US and Japanese 10-year bonds, which favors the dollar against the yen.
How does general risk sentiment influence the Japanese yen?
The Japanese yen is often considered a safe haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. In turbulent times, the yen is likely to appreciate against other currencies that are considered riskier to invest in.
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.
