Forex

The Yen in Freefall: Exploring the Causes and Consequences of Its Historic Low Against the Dollar

Calendar icon
July 2, 2024
Clock icon
Trading Team
Clock icon
Capital . com
Credit to Anna Yashina

The USD/JPY pair has reached a new milestone, climbing to a high of 161.75 on Tuesday—a level not seen since 1986. This significant movement comes amidst a backdrop of complex economic dynamics, including rising US Treasury yields, expectations of Federal Reserve interest rate cuts, and ongoing volatility in the foreign exchange market.

‍

Key Factors Driving the USD/JPY Surge

1. Rising US Treasury Yields:The US Dollar's (USD) resurgence has been fueled by an increase in US Treasury yields, with the 10-year yield rising to 4.479%. This climb is largely driven by market speculation surrounding a potential second term for Donald Trump, which is expected to bring higher tariffs and increased government borrowing. These factors contribute to the anticipation of inflationary pressures under a Trump administration, causing investors to seek refuge in the dollar, thereby pushing the USD/JPY pair higher.

2. Japanese Yen Weakness:The Japanese Yen (JPY) continues to depreciate, with its decline attributed to various factors, including Japan's accommodative monetary policy and the broader economic landscape. The yen's weakness has led to heightened expectations of intervention from Japanese authorities to curb excessive volatility. However, despite verbal warnings from Finance Minister Shunichi Suzuki, there has been no concrete action, leading to speculation that the yen might continue to weaken.

3. Federal Reserve Rate Cuts:Market participants are closely watching for signs of the Federal Reserve's next moves, with the anticipation of rate cuts in 2024. Federal Reserve Chairman Jerome Powell's upcoming speech is highly anticipated, as it may provide further insight into the central bank's stance on monetary policy. The prospect of reduced interest rates has bolstered the dollar, contributing to the upward trajectory of the USD/JPY pair.

4. Economic Indicators and Market Reactions:Recent economic data has played a crucial role in shaping market sentiment. The US Manufacturing Purchasing Managers Index (PMI) fell to 48.5 in June, marking a third consecutive month of declining activity. In contrast, Japan’s Tankan Large Manufacturing Index rose to 13, indicating a positive economic outlook. These mixed signals highlight the differing economic trajectories of the two countries, further influencing the USD/JPY exchange rate.

5. Bank of Japan's Quantitative Tightening Plans:A recent Reuters survey suggests that the Bank of Japan (BoJ) is likely to reduce its monthly bond purchases by approximately $100 billion in the first year under a new quantitative tightening (QT) plan. This reduction, set to decrease monthly purchases from ¥6.00 trillion to around ¥4.65 trillion, reflects a shift towards tighter monetary policy. However, the impact of this adjustment on the yen remains uncertain, as market participants weigh the potential implications for Japan's broader economic stability.

‍

Technical Analysis: Potential Corrections and Resistance Levels

From a technical perspective, the USD/JPY pair is showing signs of a bullish trend, trading around 161.60 and hovering near the upper boundary of an ascending channel. The 14-day Relative Strength Index (RSI) is above 70, indicating an overbought condition and suggesting a potential correction may be imminent.

If the USD/JPY pair breaks above the ascending channel's upper boundary at 161.70, it could reinforce bullish sentiment and propel the pair towards the psychological resistance level of 162.00. Conversely, immediate support is found at the nine-day Exponential Moving Average (EMA) at 160.38. A breach below this level could lead to a downward pressure, potentially driving the pair towards the lower boundary of the ascending channel at 158.50, with further declines testing June's low of 154.55.

Understanding the Broader Context: How Did We Get Here?

The current state of the USD/JPY pair is a culmination of various factors, both historical and contemporary, that have shaped the global economic landscape.

1. Historical Context:The yen's weakness is partly rooted in Japan's long-standing policy of maintaining low interest rates and stimulating economic growth through aggressive monetary easing. This approach has led to a persistent depreciation of the yen, making it less attractive to investors compared to higher-yielding currencies like the US dollar.

2. US Economic Policies:The US dollar's strength can be attributed to a combination of robust economic policies, including tax cuts, deregulation, and substantial government spending. These measures have stimulated economic growth and attracted foreign investment, leading to an appreciation of the dollar relative to other currencies.

3. Global Economic Uncertainty:Geopolitical tensions, trade disputes, and the ongoing effects of the COVID-19 pandemic have contributed to heightened volatility in the foreign exchange market. Investors seeking safe-haven assets have turned to the US dollar, driving up its value against currencies like the yen.

4. Monetary Policy Divergence:The divergence in monetary policies between the US and Japan has further exacerbated the gap between the two currencies. While the Federal Reserve has signaled a potential shift towards tightening, the Bank of Japan has remained committed to its ultra-loose monetary stance, creating a widening disparity in interest rate expectations.

5. Market Speculation:Speculative trading and market sentiment play a significant role in the USD/JPY dynamics. The anticipation of political changes, such as a potential Trump presidency, has led to speculative bets on the dollar, further influencing the exchange rate.

‍

My Thoughts: The Changing World Order

The dramatic fluctuations in the USD/JPY pair and the broader economic trends underscore a significant shift in the global financial landscape. The rising dominance of the US dollar and the weakening yen reflect deeper systemic changes, including the potential reconfiguration of global economic power.

As more countries explore alternatives to the US dollar for international trade and reserve currency status, the traditional dominance of the dollar may come under pressure. The increasing interest in cryptocurrencies and blockchain technology suggests a potential shift towards more decentralized and diversified financial systems.

In conclusion, the current state of the USD/JPY pair is a reflection of broader economic trends and geopolitical shifts. As we navigate these changes, it is crucial to remain vigilant and adaptive, understanding that the future may hold new opportunities and challenges in the global financial landscape.

‍

You might also like

Commodities
XAU/USD Nears Key Resistance: Will the Bull Run Continue?

Gold’s Surge: What's Driving the Rally and What’s Next? As we enter the new week, gold (XAU/USD) has surged past the $2,700 mark, continuing its bullish trend that has captured the attention of investors globally. Several key factors are driving this movement, including intensifying geopolitical tensions and central bank actions. In this blog, we’ll dive into why gold is experiencing this strong uptrend, what’s been happening so far this week, and what we can expect in the days ahead. What’s Driving Gold Higher? Gold is often viewed as a "safe-haven" asset, a go-to investment when markets face uncertainty. When geopolitical tensions rise or when there's fear in the global markets, investors flock to gold as a hedge against risk. Here’s a breakdown of the primary factors pushing gold upward: 1. Middle East Conflict The conflict in the Middle East has reached a boiling point, with Israel intensifying its bombardment of Beirut and a potential retaliatory attack on Iran looming. These tensions are driving investors toward gold as they seek protection from the risks and volatility in other markets. The potential for further escalation, particularly with the possibility of military action between Israel and Iran, is amplifying fears and boosting the safe-haven demand for gold. 2. People’s Bank of China (PBoC) Rate Cuts Alongside geopolitical tensions, the People’s Bank of China recently moved to cut its one-year and five-year prime loan rates. These cuts are aimed at easing credit conditions and supporting China's economic growth. From a gold market perspective, lower interest rates make non-yielding assets like gold more attractive. As Chinese investors and private buyers represent the largest market for gold globally, this policy shift is adding further momentum to gold's price rally. 3. Inflation Concerns and Central Bank Policies Globally, inflation remains a significant concern, with central banks like the U.S. Federal Reserve still navigating how to balance inflation control without stifling economic growth. High inflation typically supports gold prices as investors turn to the metal as a hedge against rising prices. Additionally, if the Federal Reserve signals a potential pause or slowdown in rate hikes, it would further support gold’s uptrend since higher interest rates often weigh on gold by increasing the appeal of interest-bearing assets like bonds. What’s Happening This Week? Gold started the week with a solid upward push, crossing into the $2,730 range during the European session on Monday, up half a percent after a more than 1% gain on Friday. This strong momentum is a continuation of last week’s performance, fueled by rising geopolitical tensions and supportive central bank actions. At the core of this movement is increased demand for safe-haven assets. Israel’s bombing campaign and the potential for escalation into a broader regional conflict have kept gold in a bullish state. On the technical side, the metal breached the key $2,700 level, a major psychological threshold, and continues to push toward $2,750. However, technical indicators such as the Relative Strength Index (RSI) are signaling that the market is overbought. An overbought RSI suggests that the asset may be due for a short-term pullback, meaning gold traders should be cautious about further long positions without a deeper correction. What Could Happen Next? As the week progresses, gold's path will likely be influenced by two key factors: geopolitical developments in the Middle East and any additional central bank policy moves. 1. Geopolitical Tensions The situation in the Middle East remains volatile, and any escalation—such as a retaliatory strike by Israel on Iran—could drive gold prices even higher. Investors will closely watch for updates from the region, as any further destabilization could add more fuel to the safe-haven demand. 2. Central Bank Policies The People’s Bank of China has already set a supportive tone for gold, and if other central banks, such as the U.S. Federal Reserve, show signs of pausing interest rate hikes, it could extend gold’s rally. Additionally, global inflation data and economic reports throughout the week may provide more insight into how central banks will respond. 3. Technical Pullbacks While the broader trend remains bullish, a technical correction may be on the horizon due to the overbought RSI. If this correction occurs, we could see a pullback toward the $2,700 support level before the broader uptrend resumes. However, any correction is likely to be short-lived, with strong underlying fundamentals pushing gold higher in the medium to long term. Conclusion Gold’s recent rally has been driven by a mix of safe-haven demand due to geopolitical risks and supportive monetary policies. As tensions in the Middle East remain high and central banks, especially the PBoC, take measures to stimulate their economies, gold continues to shine as a preferred asset for investors seeking stability. This week could see further gains, especially if tensions escalate or if central banks signal additional support. However, with technical indicators suggesting a possible pullback, traders should remain cautious and watch for short-term corrections before the overall bullish trend likely continues.

Calendar icon
October 22, 2024
MZX logo

Elevate your IB journey

Main
About
Contact
Services
Insights
Tools
Branding and Identity
connect
© 2024 MZX LIQUIDITY.
DisclaimerPrivacy  Terms & Conditions
FlagFlag
MZX liquidity acknowledges the Traditional Custodians of Country throughout Australia and recognises their continuing connection to land, sea and community. We pay our respect to Elders past, present and emerging, and extend that respect to all Aboriginal and Torres Strait Islander peoples today.