The Japanese Yen has ticked higher against the USD but remains close to over a two-month low, with uncertainty over the Bank of Japan’s rate-hike plans and a positive risk tone limiting any upside for the safe-haven JPY. Additionally, expectations for a less aggressive policy easing by the Federal Reserve and bets for a regular 25 basis points rate cut in November have supported the USD and favored USD/JPY bulls. Despite this, any subsequent slide in the USD/JPY pair may be seen as a buying opportunity and could remain limited.
The rally of US equity indices to new record highs and the US Dollar reaching its highest level since August 8 have been fueled by hopes for solid earnings and smaller interest rate cuts by the Fed, respectively. Federal Reserve officials have also noted that the recent jobs data shows the labor market isn’t weakening and that interest rate cuts should proceed with caution. With 10-year US government bond yields rising above the 4% threshold, the USD bulls have been favored, while the Japanese Yen has been capped. The market looks forward to data releases and speeches by key FOMC members for further direction.
From a technical standpoint, any further slide in the USD/JPY pair is likely to be met with dip-buying near the 149.00 mark, potentially limiting downside near the 148.55-148.50 region. Sustained strength above the 150.00 psychological mark could trigger bullish traders, leading to a challenge of the August monthly swing high around 150.85-150.90. This could pave the way for further near-term appreciation in spot prices, with buying beyond the 151.00 round figure signaling a potential bottoming out.
In the world of financial jargon, the terms “risk-on” and “risk-off” refer to the level of risk that investors are willing to take during a specific period. In a “risk-on” market, investors are optimistic and more willing to buy risky assets, while in a “risk-off” market, investors become more cautious and prefer less risky assets. Typically, during periods of “risk-on”, stock markets and commodities rise, while in a “risk-off” market, bonds and safe-haven currencies like the Japanese Yen benefit.
During a “risk-on” market, currencies of heavy commodity exporters such as the Australian Dollar, Canadian Dollar, and New Zealand Dollar tend to rise, as well as minor currencies like the Ruble and South African Rand. On the other hand, major safe-haven currencies like the US Dollar, Japanese Yen, and Swiss Franc tend to rise during “risk-off” periods. The US Dollar benefits from its status as the world’s reserve currency, while the Japanese Yen gains from increased demand for Japanese government bonds. Lastly, the Swiss Franc is favored for its strict banking laws that offer enhanced capital protection for investors.
